VAT rates

The VAT rates have not as yet changed and remain at 17.5% with the reduced rate at 5%.

Registration Threshold

The registration threshold has increased by £2,000 to £70,000 effective from 01 April 2010. The turnover threshold below which a taxable person can apply to deregister has also increased by £2,000 to £68,000 and becomes effective again on the 01 April 2010.

Postal Services

Whilst private individuals will continue to be able to receive exempt postal services from the Royal Mail certain commercial services provided by the Royal Mail and Parcelforce will become taxable and subject to the standard rate of VAT from 31 January 2011.

Landline Duty

The Finance Bill of 2010 will introduce duty on Landlines (local loops). It will become payable from 01 October 2010 at a rate of 50p per month per landline. Whilst the details are a bit scant at the moment we think it will affect businesses with a number of landlines and could cost these businesses a significant amount of money.

Other changes

There have been changes to Air Passenger Duty rates, Climate Change levy rates and Landfill Tax – Lower Rate Criteria and details of these can be provided if appropriate to any of your clients.

Elysian Associates
March 2010

The Advocate General has given his opinion that the UK’s interpretation of the EU rules regarding gifts has been too narrow and is overly restricting businesses.

There is a possibility that businesses can claim a refund of VAT declared on gifts and samples. In addition going forward the requirement for businesses to account for VAT on these items may be ended.

Under present UK rules when a business disposes of its business assets this is treated as a supply and output tax must be accounted for on those disposals. However, exceptions apply in the provision of gifts and samples. Where the value of a business gift, per person, per year does not exceed £50.00, VAT does not need to be accounted for on the supply. Under current rules this is a cumulative total, such that if goods are supplied in succession to the same individual within a 12 month period, the business must track the value of the gifts and account for VAT on the full value of the gifts supplied, once the £50.00 limit has been exceeded.

In the case of samples the current rules state that VAT does not have to be accounted for on the first supply. However, where a person is given a number of samples by the same person, whether it is on the same occasion or on a subsequent occasions, and those samples are identical and do not differ in any material respect from each other, only the first sample may be treated as a sample, all other will fall under the business gift rules.

If the Courts now follow the Advocate general’s opinion there will be opportunities for businesses to recover the overpaid VAT or to get a refund of input tax that has been incorrectly restricted on bought in goods distributed as gifts.

The Court’s decision will not be released until later this year so it is recommended that where appropriate protective claims be submitted in order to protect the periods that may be lost under 4 year capping.

Please call if you have any queries in respect of this article.

Elysian Associates
May 2010

We do! During the lead up to the election the Conservatives committed to holding an emergency Budget within 50 days of taking office. Following the establishment of the new coalition government, this means that there will be another Budget before the end of June.
Whilst nothing is confirmed, we believe that an increase in the VAT rate is inevitable. It is also possible that there will be other changes to VAT for example, an increase from zero rating to positive rate VAT on new homes.

As yet, no anti forestalling legislation has been introduced for changes to VAT in this Budget. Therefore, we believe there are potential opportunities for partially exempt businesses to reduce VAT costs. However, action needs to be taken fast if advantages are to be had before the Budget.

Of course, there is a chance that anti forestalling legislation could be introduced but it is extremely unlikely that this would have retrospective effect. Even if it does, using the last piece of anti forestalling legislation as a guide, it is likely only to capture high value transactions, say of £100,000.

As noted above, the timescale for this opportunity is very tight, so please do not hesitate to call if you would like to discuss this.

Elysian Associates
May 2010

Background

‘Salary sacrifice’ arrangements are an effective way of employers and employees reducing tax and National Insurance (NI) costs because the amount of salary sacrificed is subtracted from pre taxed income. Under the schemes, the employee agrees to forgo a proportion of their salary for a non-cash benefit. This benefit could be a contribution to pension, help with childcare or used to cover the cost of anything from a bike to a car, or a bus pass to retail vouchers.

In addition to the tax and NI benefits, HM Revenue & Customs (HMRC) position has been that, if structured correctly, many salary sacrifice arrangements also have a VAT benefit. However, this could change soon, should the European Court of Justice (ECJ) follow the opinion of the Advocate General (AG) in the AstraZeneca (AZ) case.

Astra Zeneca Case

AZ provides retail vouchers to its employees as part of their remuneration package. Currently it recovers VAT on the purchase of the vouchers but does not account for VAT on the provision to the employees. The AG considers VAT should be paid to HMRC by AZ on vouchers given to its employees. According to the AG, the salary sacrificed by employees is payment for the vouchers.

The Wider Implications

If the ECJ follows the opinion of the AG, it will be a departure from HMRC’s current position whereby salary sacrifice arrangements are not treated as ‘consideration’ for VAT purposes. The AG has accepted that AZ would be entitled to recover VAT it has paid on the purchase of the vouchers but only insofar as it accounts for VAT on the provision of those vouchers to staff. If such VAT is not accounted for, the AG considers that AZ is not entitled to recover the VAT on the voucher purchase.

If the ECJ follows the AG’s opinion, this will result in many employers who have introduced similar voucher and salary sacrifice arrangements being hit with a substantial additional VAT liability. It will also cause confusion as the salary sacrificed is not treated as a payment for direct tax and NI purposes. The decision could cost UK employers around £0.5 billion over the past four years in unpaid VAT; and over £100 million per year going forward.

The AG’s opinion also contains details of the European Commission’s submissions that the UK’s method of calculating VAT on vouchers is incompatible with EU law.

Furthermore, there is a school of thought that should the ECJ agree with the AG’s opinion, the implications may go further than vouchers, capturing other salary sacrifice arrangements, for example, cycles for work.

Should you wish to discuss this matter, please do not hesitate to contact us.

Elysian Associates
May 2010

On 7 June 2010, HMRC issued Revenue & Customs Brief 25/10, in which it announced that its policy on zero-rating for advertising supplies to charities would from herein be revised to extend to certain internet-based ‘pay per click’ (‘ppc’) advertising.
Many charities pay search engine websites such as Google a ‘per click’ fee to encourage web surfers to click on the organisation’s link in priority to any other links on the results page. HMRC’s policy had been that although adverts for charities placed on third party websites attracted zero rating, ppc advertising did not. However, following representations from a number of charities and their advisers, HMRC has revised its policy.

Ppc links appearing on a search engine website will now qualify for zero rating when supplied to a charity.

Whilst this policy revision may not go as far as charities might have hoped, it will certainly be welcomed and charities will be keen to encourage suppliers to obtain and pass on refunds of VAT overpaid to HMRC. Charities should ensure that they obtain refunds of VAT overpaid to HMRC by suppliers or via the UK reverse charge.
Should you wish to discuss this or any other VAT matter, please do not hesitate to contact us.

Elysian Associates
June 2010

Background

EU law provides a mandatory exemption from VAT for supplies of postal services made’ by the public postal services’. In the UK, the application of this provision is limited to Royal Mail and covers all of Royal Mail’s postal services. All other postal operators are required to charge VAT at the standard rate on their services.

Following a legal challenge to the scope of the exemption as applied in the UK, the European Court of Justice (ECJ), in the case of TNT Post UK Ltd, has confirmed that Royal Mail, as the operator providing the public postal service, is the only postal body in the UK eligible to exempt postal services from VAT. However, it has also ruled that exemption applies to the public postal services (that is, Royal Mail) acting as such and does not apply to supplies made by Royal Mail for which the terms have been individually negotiated.

As a result, some postal services as supplied by Royal Mail – those which are individually negotiated or not subject to any price and regulatory control – which have been treated as exempt, will become liable to VAT.

Potential Claim opportunity

It is HMRC’s view that all postal services provided by Royal Mail remain exempt from VAT until a future date. HMRC have stated that this will be with effect from 31 January 2011.

However, it is our view that businesses are due a refund of input tax which is ‘embedded’ in charges made by Royal Mail for services which it has incorrectly treated as exempt.

HMRC also appear to be trying to apply a very narrow definition to the types of services impacted, which is not supported in law.
We believe that there is potential to submit claims retrospectively as far as 1973. You will appreciate that this represents a significant potential for reclaim. We are urging our clients to consider submitting a protective claim for the period.

Please do not hesitate to contact us if you would like to discuss this opportunity in further detail.

Elysian Associates
June 2010

Background

A number of VAT registered construction companies have used the opportunity afforded by the ‘Fleming’ case to submit claims for input tax that they had been prevented from recovering previously by the provisions of the Value Added Tax (Input Tax) Order 1992 (the ‘blocking order’) and its predecessors.

The ‘Fleming’ claims in question are in respect of VAT incurred on finished and pre-fabricated furniture; materials for the construction of fitted furniture other than kitchen furniture; domestic electrical and gas appliances other than those designed to provide space heating or water heating or both; and carpets or carpeting material. These items were incorporated into new dwellings that were subsequently sold at the zero rate of VAT.

HMRC’s view is that there is no legal basis for these claims.

The sole or main argument put forward by these companies is that the application of the ‘blocking order’ to the above ‘building materials’ is ultra vires. Their reasoning is that the ‘blocking order’ that was in place at 1 January 1979 was extended in 1984 and 1987 to include these items. That extension is ultra vires because Article 176 of the Principal VAT Directive (formerly Article 17(6) of the 6th VAT Directive), which provides for the blocking of input tax deduction, states that ‘Member States may retain all the exclusions provided for under their national laws at 1 January 1979’.

Some of the companies concerned had also put forward a secondary argument. They maintain that the ‘builders’ block’ only affects ‘goods other than building materials’ that have been incorporated into a building. ‘Goods other than building materials’ that have been installed as fittings in a building have not been incorporated into a building. Such goods are not affected by the ‘blocking order’ and the companies are entitled to take credit for input tax in respect of them.

The companies appear to be basing their argument on the fact that the term ‘incorporates’ is not qualified for the purposes of the ‘blocking order’. The companies contend that there can be no read across to Note 23 of Group 5 of Schedule 8 to the VAT Act which does qualify the term. Note 23 to the Group states that for the purposes of Note 22 to the Group, ‘incorporation of goods in a building includes their installation as fittings’. However, given the context of Note 22, the goods referred to can only be ‘building materials’ and not ‘goods other than building materials’.

The way forward

Whilst this case is not yet decided there are opportunities to submit protective claims to HMRC. These claims will initially be rejected and should be followed by Appeals to the VAT Tribunals. When a lead case is identified these claims will be stood behind the lead case to await a decision. Needless to say it will require the Courts to overturn the UK interpretation of EU legislation and this could take some time.

Elysian Associates
June 2010

Currently partially exempt businesses or organisations with a mix of business and non business activities, including charities, are unable to share services such as HR and IT, as using a separate organisation to do so can create a VAT charge, which in many cases makes the position uneconomic.

However, it was announced in the Coalition Budget that HMRC will work with charities and other sectors, such as insurance and financial services businesses, to consider implementing the EU cost sharing exemption. A formal consultation is to be launched in the autumn.

Should the exemption be implemented, this would be advantageous to all entities that cannot recover VAT they incur in full, as it would allow them to pass on a share of costs incurred by more than one party without having to charge VAT.

Should you wish to discuss this or any other VAT matter, please do not hesitate to contact us.

Elysian Associates
July 2010

In June 2009, HM Revenue and Customs (‘HMRC’) announced the withdrawal of an Extra Statutory Concession (‘ESC’) 3.29, with effect from 1 July 2010. Up until this date, it was possible to obtain VAT relief at the zero rate on the construction of a building for relevant charitable use even if there was some use for business purposes, provided that business use was less than 10%.

At the same time, HMRC changed its interpretation of the term ‘solely’ as used in the phrase ‘intended for use solely for a relevant residential or a relevant charitable purpose.’
From 1 July 2010, if an organisation wishes to obtain VAT relief at the zero rate on the construction of a building that is to be used for a relevant charitable purpose or relevant residential use then the building must be used for non-business charitable purposes for more than 95% of the time.

Initial impressions might be that this is a negative change. However, in practice, it was very difficult to satisfy either the 10% or the ‘solely’ rules, as HMRC were very prescriptive in respect of the calculations that needed to be made. Now there would appear to be greater flexibility in calculating whether business use is less than 5% provided that the approach is deemed by HMRC to be ‘fair and reasonable’.

Securing VAT relief on property developments can significantly reduce the financial burden on entities that are not able to fully recover VAT, such as charities.
Should you wish to discuss this or any other VAT matter, please do not hesitate to contact us.

Elysian Associates
July 2010

Background

‘Salary sacrifice’ arrangements are an effective way of employers and employees reducing tax and National Insurance (NI) costs because the amount of salary sacrificed is subtracted from pre taxed income. Under the schemes, the employee agrees to forgo a proportion of their salary for a non-cash benefit. This benefit could be a contribution to pension, help with childcare or used to cover the cost of anything from a bike to a car, or a bus pass to retail vouchers.

In addition to the tax and NI benefits, HM Revenue & Customs (HMRC) position has been that, if structured correctly, many salary sacrifice arrangements also have a VAT benefit. However, this is now likely to change, following last week’s European Court of Justice (ECJ) judgment in the AstraZeneca (AZ) case.

Astra Zeneca Case

AZ provided retail vouchers to its employees as part of their remuneration package. It recovered VAT on the purchase of the vouchers but did not account for VAT on the provision to the employees. The ECJ has ruled that VAT should be paid to HMRC by AZ on vouchers given to its employees. The salary sacrificed by employees is payment for the vouchers. This will have significant implications for a number of businesses.

The Wider Implications

The ECJ has essentially followed the arguments of HMRC and ruled that AZ is making a supply of services (of the vouchers) to its employees and it must account for VAT on the cash received (the salary sacrificed) for those vouchers. However, AZ is entitled to reclaim the VAT incurred on the purchase of the vouchers.

This has worrying implications for any business that currently operates a salary sacrifice scheme of any kind. Any scheme that allows the provision of retail vouchers to employees is likely to be subject to investigation from HMRC following this decision, and a potential assessment for VAT due for the previous four years. Arguably, there should be some protection for businesses given HMRC’s previously accepted practice of regarding sacrificed salary as not consideration for a supply, and hence ignored for VAT purposes, but this cannot be guaranteed.

The ramifications of this case for other items for which salary can be sacrificed, for example, cars and the ‘Cycle to Work’ scheme will undoubtedly also be reviewed by HMRC and guidance issued.

Depending on how HMRC apply this judgment, this could result in many employers who have introduced similar voucher and salary sacrifice arrangements being hit with a substantial additional VAT liability. It will also cause confusion as the salary sacrificed is not treated as a payment for direct tax and NI purposes. The decision could costUKemployers around £0.5 billion over the past four years in unpaid VAT; and over £100 million per year going forward.

As always, should you wish to discuss this matter, please do not hesitate to contact us.

Elysian Associates
August 2010