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TaxationWeb by Les Howard

As a VAT Practitioner, the 2002 Budget seems to be unique in its complexity as far as VAT is concerned. The problem, of course, is finding out if and how, the various changes apply to businesses. Further, existing accountancy support must be appraised of any changes to, for example, accounting procedures.As a VAT Practitioner, the 2002 Budget seems to be unique in its complexity as far as VAT is concerned. The problem, of course, is finding out if and how, the various changes apply to businesses. Further, existing accountancy support must be appraised of any changes to, for example, accounting procedures.

The changes are introduced from a variety of dates, some from 25 April, others from the date of Royal Assent of the Finance Act, etc.

Fuel Scale Charges

There is a decrease (yes!) in the fuel scale charges. This is said to reflect fuel prices. It is, of course, welcome. As a reminder:
- are you applying the correct scale charge, with the correct engine size?
- if paying the scale charge, are you claiming all the input tax on fuel purchases?

Mutual Assistance in Recovery of Debts (MARD)

Since 1976, European legislation made provision for the pursuit of tax debts across national boundaries. But the harsh reality was, they did not work! The announcement reflects a lot of behind-the-scenes work, but also the growing problem of international and internet fraud.

Construction Work

I was surprised to discover that the reduced rate (at 8%, before falling to 5%) was introduced from 1 April 1994. From 12 May 2001, some residential conversions became chargeable at 5%. The conversion of certain properties to “multiple occupancy dwellings” will be at 5% from 1 June 2002. In addition, the renovation of “relevant residential buildings” (such as care homes) and multiple occupancy dwellings will be at 5%. VAT Information Sheet 03/2002 outlines the overall effect of changes in 2001 and 2002, so be careful if you are checking the date that construction work was completed.

There are also technical changes to the zero rating of construction work.
Zero rating is available for the construction of an annex for charitable use. Existing strict rules have been slightly relaxed, where an annex has dual use.

Where a conversion of a property is zero rated, a VAT charge applies if, within 10 years, the property is used for “non-qualifying use.” The way that this charge is calculated has been changed, to reflect qualifying use within that 10 year period.

Given that construction work is generally of significant value, advice must be taken at an early stage. Transactions in construction, property, and land, can be at 17½%, 5%, 0% or exempt, and it is all too easy to fall foul of the increasingly complex legislation.

Annual Accounting Scheme

Small businesses with annual turnover below £100,000 can join the scheme from the time of registering for VAT. Previously such businesses were required to be registered for 12 months before joining the scheme.

It should be said that the take up of the scheme remains low. There is a discipline in preparing quarterly VAT returns, which the scheme removes. Having said that, there is a convenience in not having to find a larger payment every three months, as quarterly VAT returns require.

Bad Debt Relief

A variety of changes are being introduced, which will benefit many businesses.

In order to claim Bad Debt Relief, a business will no longer have to write to his debtors with his claim. The debt will simply have to be 6 months old.

The debtor will be required to repay any input tax claimed if the invoice remains unpaid after six months. This may create difficulties where there is a dispute regarding the invoice, but the customer has claimed the input tax anyway. The procedure for checking of purchase invoices may need to be reviewed.

Partial Exemption Anti-Avoidance

Another complicated piece of legislation is aimed at those businesses which effectively claim more input tax than they are entitled to. The draughtsman has found a problem in writing legislation that reflects intention. Customs’ own phrases “deliberate abuse” and “fair and reasonable” do not appear in the legislation. Thus, a business may find a genuine arrangement falling foul of the new rules, and precipitating a significant additional cost.

The new rules apply where the use of the Partial Exemption standard method, which uses the proportions of taxable and exempt outputs to apportion residual input tax, produces an over-favourable advantage for the taxpayer. This is measured at £50,000 of 50% of the residual input tax or, where connected companies are involved, £25,000. In such cases, the over-claim has to be repaid to Customs.
In spite of Customs’ assurance that the new rules will only apply in “extremely rare” instances, I beg to differ.

Many businesses are now partially exempt, following changes back in 1999. Since then, where exempt income is only a small part of total income, a partial exemption calculation has to be carried out. The new rules will bite where a business makes a significant capital purchase (whether of not the Capital Goods Scheme applies), and the use of the purchase cannot be attributed solely to taxable activities. For example, an extension to a Golf Club House, or a Motor Dealer Showroom, or even a large advertising campaign.

Flat Rate Scheme (FRS)

The Chancellor trumpeted the introduction of the FRS as a great step forward for small businesses. The reality may be quite different. Essentially the new scheme allows a business with annual taxable turnover less than £100,000 per annum to calculate his VAT due simply as a percentage of his gross income in the VAT return period. The actual percentage to be used depends on the business activity undertaken, and appears in the Information Sheet that C&E have published. In addition, he is not required to maintain a detailed list of sales and purchases.

This simplification of the VAT regime for small businesses perhaps should be welcomed. However, there are a number of real issues:
- you must apply to C&E to join the scheme; use of the scheme is not automatic;
- according to a number of commentators, the fixed percentages which apply are generally too high for small businesses;
- a business has to maintain adequate records for his business in any case.

Where a person is in dispute with Customs about which category he is in, then his appeal can only be successful if he can demonstrate that Customs have been unreasonable. In the meantime, he will be required to pay VAT at the higher rate.

Invoices

Following discussion at a European level, requirements for VAT invoices are being harmonised across the EU. New regulations will be introduced in the UK, although it is difficult to see, at this stage, what differences will be made in practice.

One particular change which is welcome is that regulations will provide for the electronic communication and storage of invoices.

VAT Import Relief

This change only affects such goods that are acquired through another Member Sate, which would have been relieved from VAT if imported directly into the UK.

The Chancellor did mention a further relaxation of import regulations, so that VAT need not be paid up front; we await further announcement on this issue. There is a JCCC discussion paper and a JVCC discussion paper on this issue.

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Les Howard is an independent VAT Consultant, advising Accountants and SMEs with respect to VAT. His web site is at www.vatproblem.co.uk, and he can be contacted on 01733-391189.

He has also contributed to a major loose-leaf indirect tax service, as well as writing for a range of technical and non-technical publications.