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Andrew Needham, Director of VAT Solutions (UK) Ltd, reflects upon the VAT changes announced earlier this year.

Andrew Needham

1. VAT registration thresholds

The VAT registration and deregistration turnover thresholds have been increased (with effect from 1 April 2007) as follows:

• VAT registration threshold = £64,000 (up from £61,000);
• VAT deregistration threshold = £62,000 (up from £59,000)

Comment

For the first time in several years, the thresholds are increasing by more than inflation, and will benefit many small businesses that may not now need to register for VAT, or will be able to deregister.

2. Charities and the ‘change of use’ charge

Charities obtaining zero-rated new buildings and construction work under an extra-statutory concession for relevant charitable purposes will no longer be liable for any VAT charge if there is a later ‘change of use’.

From 21 March 2007, HMRC will not enforce a VAT charge if ‘non qualifying use’ of the building subsequently exceeds 10%, and this was not initially anticipated.  HMRC are inviting claims for refunds of such VAT charges paid by charities subject to the 3 year cap.

3. Non-business use of buildings

Repeal of the VAT legislation that seeks to prevent 'Lennartz' accounting in respect of land and buildings and other assets used for both business and non-business purposes (i.e. upfront full input tax deduction, followed by self-assessed output tax or non-business use).

Regulations will now specify a 10-year period (previously 20-years) over which VAT must be accounted for on the non-business use of land and buildings (e.g. by a charity or a higher/further education college) where VAT has already been recovered. The regulations will be effective from 1 September 2007 and are likely to provide transitional relief.

Comment

These changes will give rise to more significant (and earlier) VAT costs dependent on the level of non-business use. There is also likely to be some uncertainty around VAT accounting for assets previously acquired.

4. New criminal investigation powers & safeguards

Following HM Revenue & Customs issue of a consultation paper in January 2007, legislation will be introduced in Finance Act 2007 granting new criminal investigation powers to HMRC. In England, Wales and Northern Ireland, the existing provisions of Police & Criminal Evidence Act 1984 (PACE) will be applied to HMRC’s criminal investigations (different powers for Scotland).

The new provisions will primarily relate to search warrants and document production orders where HMRC is investigating with a view to a criminal prosecution, and to the circumstances where HMRC officers will have the power to arrest suspects. 

5. VAT - possible reduced rate for energy-saving products

The Chancellor, Foreign Secretary, and Minister for Europe have made a submission to European finance ministers to allow for a reduced rate of 5% on energy saving and environmentally friendly products in the home.

Comment

Businesses producing energy saving products may want to consider lobbying the Government to ensure their products are included in the reduced rate category.  No further information on this submission is available yet.

6. Alterations to housing for elderly people

The Chancellor has announced that a 5% reduced rate will be applicable to certain housing alterations for elderly people. This reduced rate will only apply to certain home adaptations, and will sit alongside the VAT zero rates already applicable to certain supplies for disabled people.  The change will be effective from 1 July 2007 following discussions with representative groups.

Comment

There is little detail confirmed at this stage on the scope of this reduced rate.  No doubt, details will follow with the consultation.

7. Missing trader fraud

From 1 May, 2007 HMRC will have powers to direct that a business purchasing electronic goods, including SatNavs and certain sorts of electronic equipment for personal amusement and entertainment purposes, will be jointly and severally liable for VAT if the purchaser has reasonable grounds to suspect that VAT will go unpaid elsewhere in the supply chain. This extends the current provisions which apply to mobile phones and computers etc.

Comment

This measure extends the current joint and several liability provisions beyond the list of electronic goods included in the domestic reverse charge provisions and is another measure to help HMRC combat missing trader fraud. Purchasers of goods listed under the new provisions will need to take extra care to ensure they have taken all reasonable steps to satisfy themselves  that they are not purchasing goods which are being used in such a fraud.

8. Smoking cessation products

'Over the counter' sales of smoking cessation products, such as chewing gum and patches, will be taxed at the reduced rate of VAT (5%) with effect from 1 July 2007 for a period of one year.

Comment

This temporary reduction in the VAT rate from 1 July 2007 conveniently coincides with the introduction of the smoking ban in public places in England.

9. Transfers of a going concern

Currently when a business is acquired as a going concern for VAT purposes, the seller has an obligation to transfer the VAT records to the purchaser. However, the seller can apply to HMRC for a direction to retain its records. The changes mean that the seller would automatically retain its records and would only be required to pass on certain information, as defined by law, to the buyer. The only circumstances under which records would be required to be transferred to the purchaser would be if the purchaser were to retain the seller’s VAT number. The changes are effective 1 September 2007.

Comment

This proposal removes an unnecessary piece of bureaucracy, and replicates what many businesses have been doing in practice for a number of years.

10. Reform of fuel scale charges

New VAT fuel scale charges (which charge VAT on the private use of road fuel provided to employees) will be introduced. The charges will be based on the CO2 emissions ratings of the vehicle rather than the engine size. There will now be 21 ‘bands’ of charges with a much greater range between the highest and lowest charges. The new fuel scale charges take effect from the start of the first VAT accounting period commencing on or after 1 May 2007.

Comment

This change has been expected since Budget 2005 and marks another attempt to reform the tax system to reflect the increasing importance of reducing the UK’s CO2 emissions.

11. Effective date of VAT payments by cheque

The introduction of online filing and electronic payment of tax returns and payments which, for VAT, is scheduled to be phased in from 2010 means HMRC will also realign the effective date for acceptance of payments received by cheque. New regulations will be issued in draft in the Finance Act 2007 and will be subject to consultation. The proposal is that the payments received by cheque will only be effective from the date the funds are cleared into HMRC’s account.

Comment

This measure is among a number proposed by the recent Lord Carter review on electronic filing. It is intended to encourage electronic filing of both tax returns and accompanying payments. At present the receipt of returns and payment is deemed to be the date of receipt by HMRC. The new rules will improve cash flow for HMRC but, implemented effectively, should also make filing simpler for businesses submitting online.

12. New VAT penalty regime

A single new penalty regime for incorrect returns for income tax, corporation tax, PAYE, NIC and VAT will take effect in 2009. This measure is part of an initiative to standardise and simplify the existing penalty regime right across the taxes. The new rules will be based on both the amount of tax understated and the behaviour that gives rise to the understatement with no penalties being applied for “mistakes” but, at the other end of the scale, higher penalties for “deliberate action with concealment”. There is also a new concept of suspended penalties. 

Comment

Taxpayers may find it easier to understand a single penalty regime applicable across the different taxes.

13. Betting and gaming changes

Following the Gambling Act 2005, there was a review of Remote Gaming Duty for non-UK established online betting and gaming operators.  Included was a review of the VAT exemption for remote betting and gaming player-to-player participation fees, which will remain unchanged.

Comment

This measure appears to be primarily aimed at Academies and allowing wider community use of their existing sports facilities without it leading to a VAT cost. However, it does not mitigate the VAT costs on these types of facilities where such use is anticipated on purchase/construction. It may also lead to potential uncertainty in obtaining zero-rating in the first instance.  Affected charities should consider whether they are able to make a claim.