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TaxationWeb by VATEase

This article summarises some of the main changes relevant to Value Added Tax, brought by the Chancellor in the 2003/04 Budget.Easing the burden



VAT Registration and Deregistration Limits

•Registration threshold raised to £56,000

•Deregistration threshold raised to £54,000

•With effect from 10 April 2003.



Flat Rate Scheme

•Maximum annual taxable turnover raised to £150,000 (VAT exclusive)

•Total annual turnover (including exempt and other non-taxable income) limit raised to £187,500

•Minor changes are made to the flat-rate percentages applied to some trade sectors and to the implementation of the scheme.

•VATease Comment

- The flat rate scheme allows businesses to calculate their net VAT due based on a % of their turnover. It is intended to reduce the burden of accounting for VAT.

- We recommend that an exercise should be carried out before implementing the scheme to ascertain whether it is favourable.



Annual Accounting Scheme

•Maximum turnover level for immediate entry raised to £150,000.

•VATease Comment

- The annual accounting scheme allows businesses to submit just one VAT return per year. It is intended to reduce the burden of accounting for VAT.

- Businesses with turnovers up to £150,000 can join immediately. Businesses with turnovers up to £600,000 can join after being registered for 12 months.



Import VAT

•A reduction of the amount of security required for the VAT element of the Duty Deferment Scheme for “approved” importers. In some cases to zero.

•With effect from 1 December 2003.

•Consultation to be carried out regarding “approval” criteria.

•VATease Comment

- This affects all importers.

- There is no mention of the previous intention to introduce DAVIS (a delayed accounting system).



Non-EU Businesses providing electronically supplied services to EU consumers.

•Optional scheme will now allow these businesses to register and account for VAT electronically.

•Registration will be required in just one EU Member State rather than in each one where services are provided.

•Member State of registration will distribute the VAT due to the appropriate Members States.

•Changes to EU regulations to be made in July 2003 would have required such companies to register in each member state where they provided services to non-VAT registered people.

•With effect from 1 July 2003.

•VATease Comment

- It appears that the electronic return to be submitted to the Member State of registration will require the details of VAT due in each Member State.

- This will affect companies like AOL who provides Internet services from the USA to private individuals.



Default Surcharge

•Although no Budget Notice has been released, the Chancellor specifically mentioned an increase to £150,000 of the limit below which penalties for late submission and payment of VAT returns will not automatically be applied.



Administrative Changes



Exchange of information with other EU Member States

•Legislation allowing UK Tax Authorities to assist other Member States is being consolidated. It is also paving the way for amendments that will need to be made following future changes in EU Law.

•Operative from royal assent.



Fuel Scale Charges

•As always, FSCs have been amended to reflect changes in fuel prices.

•VAT due per quarter for a petrol car will now be £35.29 for a car under 1400cc, £44.68 for a car up to 2000cc and £65.82 for cars over 2000cc.

•Other figures available from VATease.

•Effective from first VAT return starting on or after 1 May 2003.



Business Gifts

•A slight change in the rules applied to business gifts.

•VAT will be due on gifts made if the total costs of gifts made to one person over a 12 month period exceeds £50.

•With effect from 1 October 2003

•VATease comment

- Historically the £50 limit was applied to single gifts or “a series or succession of gifts”.

- Whilst clearer and easier to understand, the new rules will require businesses to keep records of gifts given and whom they were given to.



Interaction with Stamp Duty

•Stamp Duty on leases will no longer be calculated on a VAT inclusive amount if the landlord has not opted to tax.

•VATease Comment

- Historically, unless a lease specifically precluded the charging of VAT, Stamp Duty has been calculated on the VAT inclusive amount regardless of whether or not VAT was actually charged.



Good Cop / Bad Cop



Late Registration Amnesty

•Businesses who have so far failed to notify HM Customs & Excise of their requirement to register for VAT will be able to do so without incurring a Belated Notification Penalty.

•Tax arrears must be paid in full and all returns and payments must be submitted on time for 12 months after registration otherwise BNP will be re-instated.

•Quote from the Budget Notice: “Debt Management Units will be willing to discuss the settlement of arrears.”

•VATease comment

- This is a one off exercise that will run until 30 September 2003.

- Unregistered businesses should confirm whether they are required to register whilst the offer is still valid.

- We recommend you seek advice before approaching HM Customs & Excise.



Civil Penalties

•Changes to the Civil Penalties regime for non-compliance and evasion.

•Non-compliance penalties:

- Apply to:

- Occasional errors over £10,000 VAT or Duty

- Persistent small errors of failure to comply with obligations; and

- Failure to put right deficiencies when directed to do so.

- Penalties will not be issued automatically. Written warning will be issued first.

- Penalty of up to £2,500.

- Mitigation and Reasonable excuse still applies.

•Evasion penalties:

- Alternative to Criminal Prosecution.

- Up to 100% of the VAT or Duty evaded.

- Will be reduced for cooperation.

•With effect from Autumn 2003.



Anti-Avoidance



Sale of new commercial buildings

•Anti avoidance legislation blocking a scheme whereby part payment for a new building was delayed beyond 3 years and therefore became exempt.

•The sale of Commercial property less than 3 years old is subject to VAT.

•Formerly, where the final selling price was not known at the time of sale, VAT could be declared when payment was received.

•Avoidance schemes were prevalent where a large bulk of the price was not paid until the building was more than 3 years old. This payment became exempt.

•The liability of payments made after three years will now remain standard rated.

•Other avoidance schemes involving the sale of vacant land will be blocked.

•Will apply to all property sales on or after Budget Day.



Face Value Vouchers

•Intermediary suppliers of FVVs who both buy and sell the vouchers will now have to account for VAT on the full selling price of the vouchers.

•There will be some exceptions to the rule, primarily where vouchers are supplied for no consideration.

•Previously the supply of FVVs was not subject to VAT. This treatment will remain for those who issue and agree to redeem the vouchers.

•With immediate effect.

•VATease Comment

- FVVs include not only gift vouchers but also most telephone cards.

- The Budget Notice states that these businesses will be able to recover VAT on the purchase of these vouchers “subject to the normal rules”. It is unclear whether they will be able to recover VAT on the vouchers if they have bought them from someone who is not required to charge VAT (i.e. the original issuer). It is possible therefore that they will be required to apply a mark up of 17.5% before they start to make a profit.



Tax point for continuous services.

•Supplies of some types of continuous services between connected parties will have tax points (when VAT is due) created periodically.

•Historically VAT has only been chargeable when an invoice has been raised or payment has been made. Some connected parties have been using this to avoid payment of VAT.

•With effect from 1 August 2003.

•VATease Comment

- This will have an effect on connected companies who make management charges or lease property to each other but never invoice or pay them.

- Often the only evidence of such supplies is an ever-increasing provision in the accounts.

- HM Customs & Excise are now likely to look for these provisions.

- The scale of these charges will often mean that any assessment of VAT will result in a Misdeclaration Penalty.



Anti avoidance measure for property used for non-business purposes.

•Input VAT on the purchase of land and buildings will, in future, have to be apportioned if there is to be any private or non-business use.

•VATease Comment

- Historically, case law has been applied that allows full input VAT recovery and the VAT cost of private and non-business use to be paid as an output VAT charge over a long period of time.



Anti Fraud Measures



The budget has seen the introduction of 3 major new anti-fraud measures aimed at combating Missing Trader Fraud. Some of these may have major implications for all VAT registered businesses. Missing Trader Fraud is conservatively estimated to be costing the Govt. £2 billion per year.



Evidence for input VAT deduction

•Companies dealing in computers, phones, alcohol products and fuel who attempt to recover VAT without a valid tax invoice will now be required to provide a higher standard of alternative evidence to be entitled to claim input VAT.

•VATease Comment

- This will have a limited effect and puts into place what has effectively been Customs policy to date.



Extension of Security Powers

•An extension of Customs power to require security.

•Customs can now require security from businesses who, despite warning, trade with or are “linked by trade” to businesses that evade VAT through hijacking VAT registration numbers, going missing or becoming insolvent.

•VATease Comment

- Events that are not under a businesses control, i.e. the activities of businesses you trade with, may now cause Customs to require you to pay a security.



Joint and Several Liability for Supplies

•Where a business receives a supply of specified goods or services and knew, or had reasonable grounds to suspect, that the supplier would not pay the VAT on that supply it will be held liable for that VAT.

•“Specified goods” currently includes:

- Telephones, parts and accessories.

- Computer equipment, parts accessories and software.

•Customs are to produce a statement of practice giving details of steps that businesses can take to avoid being unwittingly caught out by this measure and defences available against it.

•VATease Comment

- A measure long predicted by VATease, this is the start of a very slippery slope to a point where the tax is policed by the taxpayers.

- This places an extremely heavy burden on anyone purchasing “specified goods” to confirm that their suppliers are, and remain, VAT compliant.



If you have any questions relating to this news release, please call Simone, Paul or Terry on 0121 778 4299



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