A number of guidance documents have been released by HMRC’s website in anticipation of the standard rate reverting to 17.5% on 01 January 2010. The documents include a “Detailed guide for VAT registered businesses” and guidance on the application of the “anti-forestalling” legislation. All businesses should consider the impact of the increase in the standard rate to them and how best to deal with it, and should take the necessary preparatory steps as soon as possible.

The “Detailed guide for VAT-registered businesses” announces HMRC’s “light touch” policy when dealing with errors concerning the change of rate. This means that HMRC will not target change of rate errors when planning audit work that are unlikely to lead to any material net revenue loss, will not seek to adjust errors unless there is reason to suppose that there is an overall revenue loss, and will take into account the difficulties faced by the taxpayer when considering penalties. It also includes guidance on the following topics:

• the effect on taxpayers operating retail schemes (including bespoke schemes) and other special schemes;
• the correct issuing of invoices and procedures for correcting erroneous invoices;
• the treatment of deposits, prepayments, refunds and bad debts;
• supplies that span the rate change and the supplier’s option to disregard actual tax points;
• the meaning and treatment of ‘continuous’ supplies and supplies carried out over a period of time;
• changes that may be necessary to electronic till and accounting systems;
• increasing prices charged to customers;
• completing VAT returns which straddle the change of rate;
• recovering input VAT;
• the treatment of VAT invoices with annual payment schedules and self-billing arrangements;
• cross-border services and the ‘VAT’ Package changes to the time of supply rules (see also );
• the impact on partially exempt businesses;
• the effects of the change on those within the flat rate or margin schemes, and those making payments on account or on annual or cash accounting;
• the implications for particular types of business, including the construction sector and the legal profession;
• the treatment of particular types of transactions, including those through coin operated machines, hire purchase, conditional sales and credit sales, sales of tickets to events (including season tickets) and international trade in goods; and
• the anti-forestalling provisions (see below for more detail).

The detailed guide (which also includes annexes on HMRC’s “light touch” approach, the time of supply rules, and fuel scale charges) can be accessed on the HMRC website via this link.

The guidance document on the anti-forestalling provisions sets out HMRC’s views on the application of the new legislation. Salient points include:

• the scope of the legislation is such that it is likely to affect very few businesses;
• even if one of the relevant conditions is satisfied, the “supplementary charge” will only apply if the recipient of the supply cannot recover the VAT in full (NB the test is specific to the VAT on each transaction in question, rather than catching all supplies to partially exempt customers);
• clarification that the extension of the “connected party” test to cover series of supplies of substantially the same goods or services is intended to prevent the insertion of an unconnected intermediary customer into the supply chain;
• the definition of “providing funds” for a prepayment is very wide, and includes situations where part of the prepayment is lent back to the customer or a connected party;
• the “related supplies” provision is intended to catch situations where a business makes a series of supplies to the same customer, each of which is below the £100,000 limit but which exceed it in aggregate;
• the “normal commercial practice” test can be met where the business makes prepayments or issues VAT invoices as part of its own practice (established by evidencing similar transactions in the past) or where such practices are normal in the sector (in accordance with “the industry norms”);
• in HMRC’s view, transactions entered into by special purpose vehicles (SPVs) set up as part of forestalling arrangements are not in accordance with normal commercial practice;
• the supplementary charge of 2.5% is, in HMRC’s view, VAT and must be accounted for as output tax in the VAT return for the period including 1 January 2010 (or the subsequent date on which a relevant right to receive goods or services is exercised); and
• the supplementary charge can be passed on to customers (unless the contract specifies otherwise) and may be partly recoverable as input VAT and the supplier must issue a special “Supplementary charge” VAT invoice to the customer (secondary legislation requiring the supplier to do this will be laid before Parliament later this year).

The anti-forestalling guidance is available on the HMRC website via this link.

The guidance is a useful summary for businesses of the impact of the rate change in a number of different circumstances, and HMRC’s announcement of a “light touch” approach to compliance is particularly welcome. However, a number of legal, practical and systems issues remain unresolved. Businesses should consider how best to deal with the change and should start taking the necessary preparatory steps as a matter of urgency.

If you require further information regarding any of the points above please do contact us.

Elysian Associates

August 2009

0025

HMRC has now published the final guidance, following recent consultations and an Open Day held in July. This guidance explains the duties of the SAO of qualifying companies liable to taxes and duties in the UK, in ensuring that they establish, maintain and certify appropriate tax accounting arrangements as required by Schedule 46 Finance Act 2009.

Qualifying companies

• Charities are within the scope of the provisions if they meet the qualifying conditions.
• Foreign branches of UK companies are within the scope. However, whilst HMRC would expect reasonable steps to include a check that foreign tax has actually been paid, an in-depth assessment of the branch’s foreign tax processes would not normally be expected provided these are carried out by suitably qualified and competent individuals.
• UK-incorporated but non-resident companies will only be in scope to the extent that they have taxable activity in the UK. Detailed consideration of their foreign tax processes is unlikely to be required.
• Dormant companies are in scope but are generally unlikely to have tax accounting arrangements that the SAO needs to consider.
• For companies in administration or insolvency, where there is no individual who meets the definition of the SAO, the legislation will not apply.
• Reflecting the importance of the CRM to the SAO process, HMRC has undertaken to assign a CRM to those companies which qualify but which do not currently have a CRM.

Qualifying test

• Confirmation that, for both the turnover and balance sheet asset tests, the amounts for UK entities are simply aggregated, with no adjustment for inter-company amounts.
• The turnover test considers only the amount shown as turnover or revenue on the face of the statutory accounts, so excludes adjustments made in tax computations.
• As banks and insurance companies do not normally show turnover on the face of the accounts, the asset test alone will be relevant in determining whether they fall within the measure.
• No formal notification to HMRC is required if a company or group ceases to meet the size criteria.

Taxes covered

• Air passenger duty is included as an excise duty.
• Where the qualifying company administers third party liabilities in respect of the in-scope taxes, the processes are covered by the legislation. For example, for stamp duty reserve tax (SDRT), this extends to brokerage activities.

Taxes excluded

• NIC and other employer responsibilities such as student loans and national minimum wage.
• Tax reporting under the construction industry scheme (CIS); and for income tax on forms such as CT61 or SX1 for manufactured overseas dividends.
• Environmental taxes – landfill tax, aggregates levy and climate change levy.

Commencement

• An SAO who starts a review in the first financial year will be treated as having taken “reasonable steps” in respect of that year and therefore any failure in the main duty would not attract a penalty.
• However, this concession is only available to companies which fall within the legislation for their first financial period starting after 21 July 2009.

Reasonable steps

• Where outsourcing arises intra-group, for example where tax is dealt with by a group tax director, the guidance suggests that the principles of what constitutes reasonable steps are similar to those for outsourcing to third parties. Thus, they would include an assessment of the qualifications and competency of the individual, but would be unlikely to require detailed checking of the work delegated.
• Where an SAO changes during a year, HMRC does not expect the new SAO to check the work of their predecessor where the tax accounting arrangements appear to be in order. If the arrangements turn out to be inappropriate, provided this could not have been known by the new SAO, no penalty would arise.
• The examples of “reasonable steps” have been extended to include two relating to customs duties.

Further information

The guidance, and other relevant information, is available from the SAO page on the HMRC website: click here.

If you require further information regarding any of the points above please do contact us.

Elysian Associates

August 2009

0026

What is the reverse charge?

Normally the supplier of the service is the person who must account, to the tax authorities, for any VAT due on the supply. With effect from 01 January 2010 it is the customer who must account for the VAT due on intra-EC taxable supplies. Although called reverse charge, the procedure may also be referred to as tax shift. Where it applies to services you receive, you, the customer must act as if you are both the supplier and the recipient of the services.

How do I account for reverse charge services on my VAT return?

You should credit your VAT account with an amount of output tax, calculated on the full value of intra-EC taxable supplies of services received from another Member State and at the same time debit your VAT account with the input tax to which you are entitled, in accordance with the normal rules.

The partial exemption implications for reverse charge services are explained in Public Notice 706 Partial Exemption.

You should then include in the following boxes of your VAT return:

• The amount of output tax in box 1 VAT due on sales
• The amount of input tax due in box 4 VAT reclaimed on purchases
• The full value of the supply in box 6 total value of sales
• The full value of the supply in box 7 total value of purchases

The value of supplies/acquisitions of services should not be included in boxes 8 and 9 of the VAT return.

If you require further information regarding any of the points above please do contact us.

Elysian Associates

August 2009

0024

From 01 January 2010 businesses will have to provide EC Sales Lists for taxable supplies of services as well as goods, to which the reverse charge applies.

This does not apply to services that are

• exempt according to the rules of the Member State where the supply takes place,
• B2B supplies where the recipient is not VAT registered or
• B2C supplies.

Presently HMRC intend to use the same form that is used for reporting goods (VAT 101) and businesses will require the following data:-

• Country code
• Customers VAT registration number
• Total value of the supplies in Sterling
• An indicator will also be required to identify services

The form has to be submitted either electronically or in paper form, on a quarterly basis but there are anti-fraud measures being considered that may require the need to complete forms on a monthly basis.

Threshold for quarterly reporting periods for goods

During the period 01 January 2010 to 31 December 2011 quarterly ESLs can be submitted:

• If the total quarterly value of the intra-EC goods (excluding VAT) does not exceed £70,000 in the current quarter, or in any previous four quarters.

And from the 01 January 2012 onwards

• If the total quarterly value of supplies of intra-EC goods (excluding VAT) does not exceed £35,000 in the current quarter, or any of the previous four quarters.

If a client fails to submit an ESL by the due date daily penalties will be levied of £5, £10, £15 and so on and £100 if the ESL is incorrect. However, as long as a business can demonstrate that steps are being taken to comply with the legislation at the earliest opportunity HMRC will not levy penalties.

If you require further information regarding any of the points above please do contact us.

Elysian Associates

August 2009

0023

Firstly the changes come into effect from 01 January 2010. Further changes come into effect in 2011, 2013 and 2015.

Secondly the changes apply to businesses supplying and receiving services from overseas businesses, businesses supplying goods to other EC countries and those businesses that want to reclaim VAT incurred in other EC country.

Thirdly the changes alter the Place of Supply rules.

• Most services provided to business customers will be treated as supplied in the country where the business customer is established. The business customer will account for VAT under the ‘reverse charge’ mechanism.
• Services provided to non-business customers will still be liable to VAT in the country of the supplier.

New EC Sales Listings for services and changes to ESLs for Goods

UK VAT registered businesses that supply services to EU businesses, where the supply is the customers country, will have to complete ESLs for each calendar quarter and submit these within 14 days for paper returns and 21 days for electronic returns.

UK VAT registered businesses that supply goods to other EU countries already submit ESLs. From 01 January 2010 there will be new rules reducing the time limits in line with those above and anti fraud measures which reduce the threshold from £70,000 to £35,000 already introduced in January 2012.

Refunds of VAT from other EU member states

A new electronic VAT refund process will be introduced across the EU for all claims submitted after 01 January 2010 to replace the current paper based system. UK bases businesses will be able to submit claims on a standard form through the Government Gateway rather than to the Member State of Refund as at present.

What must be done now?

Businesses need to consider whether they will be affected by the changes and what changes to their accounting systems will be required to implement these new rules from 01 January 2010 to account for VAT under the reverse charge and/or to capture the information needed to submit ESLs. They should also consider obtaining the VAT Registration Numbers of regular business customers in other EU countries.

If you require further information regarding any of the points above please do contact us.

Elysian Associates

August 2009

0022

HMRC have issued a new Business Brief 40/09 and are inviting claims from taxpayers who have overpaid output tax on what should now be treated as an exempt supply. However, HMRC point out that further bingo duty may be due. With regard to slot machines the High Court has yet to issues its judgment.

Any business with a bingo duty assessment may wish to seek further advice.

HMRC announce that they are changing their bank details

Taxpayers should make sure they use the correct bank details from July 2009.

Sort code – 08-32-00

Account – 11963155

Name – HMRC VAT

Revised interpretation of ‘occupation’ of property for VAT purposes

HMRC have issued Business Brief 33/09 which sets out their revised policy on the meaning of occupation. The House of Lords decided that ‘occupation’ requires not only physical presence but also permanence, control over the property and exclusivity. HMRC invites claims from taxpayers who have incorrectly been denied recovery of input tax.

Three year capping being extended to four

All VAT claims are now capped at four years or back to April 2006 whichever is shorter.

Adjustments of errors

Recently issued Public Notice 700/45 outlines the ins and outs of correcting errors and gives details of where to send notifications.

If you require further information regarding any of the points above please do contact us.

Elysian Associates

August 2009

0021

The current series of VAT numbers has been in use since the 01 April 1973 and not surprisingly the available numbers within the series will shortly be used up.

Over the next 12 months HMRC will introduce a new series of registration numbers and this means that the current means of checking the validity of a VAT number (referred to as the modulus 97 check) will not work with the new numbers.

A new modulus check has been devised by HMRC but at the moment they will not be making the information public although they will provide details of the new check to anyone who requests it!

It should be noted that in order to check whether a VAT registration number is valid it will be necessary to use both modulus checks. Having looked at the detail of the new modulus 9755 check it seems more complex and requires 2 mathematical calculations.

Thankfully HMRC’s Helpline will continue to provide the service of confirming the validity of a VAT number if you give them a call. However, they won’t tell you who it belongs to!

Elysian Associates

April 2009

0020

Since 1995 HMRC have allowed a concession where a car dealer has failed to maintain the necessary records in order to support the margin scheme. Under the concession even where a dealer did not hold the necessary information HMRC would still allow VAT to be accounted for on notional profit margins.

HMRC have announced that from 01 April 2010 this concession is to be withdrawn as it does not fit within European Law which means that where a dealer does not hold the necessary evidence to show the profit margin for each car VAT will be payable on the full selling price of each car.

You should ensure that any car dealer clients are aware of this important change and always obtain and keep the necessary documentary evidence to support the purchase and sale price of each car.

Elysian Associates

April 2009

0019

I am sure that TOMS puts fear into the hearts of most tax professionals and we are no exception but we do have access to the Country’s foremost expert on the subject and he can be made available to you if the need arises.

Changes are being forced by the European Commission because it considers that the UK’s operation of TOMS is not fully compatible with the Principal VAT Directive.

There are four areas of change

• Supplies to business customers for their own consumption – business to business (B2B)
• Supplies of educational school trips

Both of which could be excluded from TOMS and invoices could be raised in the normal way allowing VAT recovery if partial exemption allowed.

*    There will be a number of clients who use travel agents to book hotel accommodation for their employees when undertaking business trips. In the future it may be preferable to book direct.

• Supplies to business customers for subsequent resale

Here the old rules allowed businesses to include these sales within TOMS because they were incidental but the Directive refers to the ‘traveller’ and a person who sells on to a third party is another B2B sale and must now be invoiced with Tour Operators having to change their accounting practices to account for VAT under the normal rules.

*    Some may have to register in other Member States.

• Use of market values in respect of in house supplies

This aspect is for those businesses who currently undertake the TOMS calculation and needs to be studied in depth before advice can be given as each case needs to be considered separately.

Elysian Associates

April 2009

0018

HM revenue and Customs have announced changes in their Information Sheet 04/09 to the Standard Method for calculating partial exemption.

Basically businesses may now

• use the previous year’s percentage to determine the provisional recovery of residual input tax in each VAT return prior to the year end adjustment
• bring forward their annual adjustment to the last VAT return of the tax year

and;

• for newly exempt businesses HMRC are allowing input tax to be recovered on a

use-based’ basis rather than the old complicated basis of the ‘Standard Method override’ in the registration period or during the first tax year depending on whether the conditions can be satisfied.

This all means that the correct amount of VAT is accounted for earlier than perhaps it once had been.

Elysian Associates
April 2009

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