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TaxationWeb by VAT Solutions (UK) Ltd

VAT Solutions (UK) Ltd comments on VAT changes included in this week's Pre-Budget Report.

VAT partial exemption

HMRC has introduced two variations to the existing partial exemption rules following an informal consultation which was introduced in the 2006 Budget. The first is a requirement for the business to sign a declaration that a proposed partial exemption special method is fair and reasonable. The second is to allow businesses with a special partial exemption method to create a ‘combined method’ which covers VAT recovery on certain overseas supplies (such as supplies of financial services and insurance to non-EU customers).

HMRC will be implementing the above changes with effect from 1 April 2007.

When proposing a new special partial exemption method, a business will have to declare that, ‘to the best of its knowledge and belief’ the method is fair and reasonable. While it has always been the case that a special method must be fair and reasonable, the new measure will give HMRC the power to set aside a method that it does not believe to be fair and reasonable. This means that a business could be required to make a retrospective adjustment to its input tax recovery, which is not the case under the current special method rules. The introduction of such a power is likely to lead to increased uncertainty for partly exempt businesses. Given that businesses and HMRC will often have different views on what is fair and reasonable, it is also likely to lead to an increase in disputes.

The introduction of special ‘combined’ partial exemption methods, which incorporate supplies made to overseas customers with the right of input tax deduction, will allow businesses to move away from the two-stage apportionment process. Currently, a business/non-business apportionment of input tax would normally take place prior to a partial exemption calculation. The opportunity to agree a single combined method should simplify VAT recovery for many businesses.

Missing trader intra-community fraud

The government also outlined its strategy for tackling Missing Trader Intra-Community (MTIC) Fraud, or ‘Carousel fraud’. The strategy includes:

• identifying and prosecuting the criminals behind fraud

• working internationally to combat cross-border fraud

• identifying and tracking those goods most susceptible to MTIC fraud, and

• more in depth checking of suspect repayment claims.

New estimates show that attempted MTIC fraud grew to between £3.5bn and £4.75bn in 2005/06. The Government is continuing to negotiate with other EU member states to secure its proposed introduction of reverse charge accounting for goods most commonly used in fraud.

Transfer of going concern

HMRC has made alterations to the VAT record keeping requirements for businesses transferred as a going concern in order to bring them into line with other tax and regulatory regimes. The effect of this change is that the seller will keep his records except in the few cases where, because the buyer retains the seller’s VAT number, it is essential for VAT compliance purposes that the records are passed over. The VAT law, as set out in S49(1)(b) of the VAT Act 1994, will be amended so that the information that must be passed to the buyer is set down in the law, and so the changes outlined above are reflected. These changes will take effect from the date on which the Finance Bill 2007 receives Royal Assent.

This change should not pose too many problems from a practical point of view. However, businesses should note that they may no longer automatically have access to the transferor’s records. Once such example of where the transferor’s records may need to be consulted is where capital items are included as part of the transfer of the business as a going concern, and the initial recovery percentages need to be referred to in order to make future adjustments under the capital goods scheme. The transferee will need to make separate arrangements to obtain information from the transferor in such circumstances, where the records are not passed over. This, in turn, may increase the complexity of the legal documentation for such transactions.

Company car fuel

Where, in any VAT period, a taxable person supplies ‘fuel for private motoring’ to an individual and recovers the input VAT, output VAT must be accounted for using the VAT fuel scale charges. As announced in the 2005 Pre-Budget Report, the basis of the charges will be changed from the engine size and fuel type to a car’s carbon dioxide rating. This will take effect from 1 May 2007 and will align the VAT system with that operated for income tax purposes. HMRC will publish details of the new regime in good time to allow businesses to familiarise themselves with it, and make any necessary systems changes. This is another example of reforms made in order to align tax policy with environmental objectives.
December 2006

VAT Solutions (UK) Ltd
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Stockton Heath
Warrington
WA4 6JT

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VAT Solutions (UK) Limited is an established independent firm of Chartered Tax Advisers, formed by Andrew Needham and Steve Allen. The company has a cross-section of clients from multi-national companies through to medium-sized and numerous smaller regional firms of accountants and solicitors. They produce a regular publication 'VAT Voice', which can be downloaded directly from the Internet via their website: