All changes apply from the date of the Budget, 9 April 2003, unless otherwise stated.
New commercial buildings
Payments for the purchase of buildings under 3 years old are VATable; whereas payments for buildings older than this are exempt unless the parties have opted to tax. Prior to the Budget, VAT was chargeable on the sale of buildings when payment was received rather than at the date of sale. Businesses were therefore able to reduce their VAT charge by deferring payment of the bulk of the consideration until after the 3 year threshold. There was some amendment of these provisions in the Pre-Budget report to block use of this scheme from 28 November 2002. Further changes in the Budget ensure that the liability of payments made after 3 years will remain VATable at the standard rate if the original sale was standard-rated.
Buildings used for private or non-business purposes
Previously, where a business acquires an asset which is to be used partly for private purposes, the business could recover the full input tax deduction on the purchase of the asset, paying output tax for their private use by a gradual charge over the asset’s lifetime. In the case of land, buildings and civil engineering works, for which depreciation rate is very slow, and which can be disposed of exempt from VAT, this allowed businesses to delay, and perhaps avoid, any payment of such output tax. The Finance Bill contains a new measure which provides that private and non-business use of land and buildings can no longer be accounted for in this way and will be taxed in the normal way for mixed use assets, i.e. by apportionment of the VAT incurred so that only the business element counts as deductible input tax.
A new joint and several liability provision for telephone and computer supplies
A new measure has been introduced to make all businesses in a supply chain joint and severally liable for VAT on certain goods that has not been paid by a missing trader. The measure is restricted to telephones and telephone parts and accessories and computer equipment, parts, accessories and software. To be liable, the business must have received the goods or services in circumstances where it knew or had reasonable grounds to suspect that the VAT on those goods or services would go unpaid. Customs & Excise consider that a business will fall into this category if it has itself benefited from the failure to account for VAT.
Customs & Excise is currently undertaking a consultation exercise to decide what checks they can reasonably expect a business to undertake and will not apply the measures to businesses within the ‘reasonable grounds to suspect’ category until this process is completed. The Finance Bill contains a provision which would bring in an automatic, but rebuttable, presumption that a person has ‘reasonable grounds to suspect’ if the price payable by him for a supply is less than the lowest price he might reasonably expect to pay for them on the open market or if the price was less than it had been on previous supplies of those goods.
It is not clear whether the liabilities could extend to penalties as well as unpaid VAT. However the explanatory notes to the Finance Bill suggest that the measure will only relate to unpaid VAT. The defences to these provisions will be complex and could involve human rights issues as well as VAT law.
VAT tax point for certain on-going supplies
Examples of on-going supplies are electricity, piped gas and water, leasing of property and equipment, management services and telephone services. Currently VAT becomes due on such supplies on the earlier of when a VAT invoice is issued or a payment received. Where a business makes a supply to a connected business that cannot recover all of its input tax, it is possible for the supplier to delay its VAT liability for the recipient, perhaps indefinitely, by delaying invoicing and payment.
From 1 August 2003, where on-going supplies are made between connected persons, tax points will be created periodically, in most cases based on 12 month periods. The most common case of connected persons will be subsidiaries and fellow subsidiaries but there are other possibilities and the provisions cover connected persons and partnerships as well as companies. Businesses will be able to defer the tax point further by invoicing within 6 months of the end of the one year period and Customs & Excise will have a discretionary power to delay the tax point where there is a ‘genuine commercial need’.
Limitation on exemption on face value vouchers
The treatment of face value vouchers (such as gift vouchers and telephone cards) has featured in a number of recent cases. As the law stood before the Budget, when a face value voucher was sold there was no VAT payable except to the extent that the consideration exceeded the face value of the voucher. Otherwise VAT was only due when the voucher was redeemed and then only on the amount the voucher was initially sold for rather than its face value. If the vouchers were not used, no VAT would be due. Any trading in vouchers was also disregarded for VAT purposes.
The changes in the Budget restrict the payment at redemption treatment generally to sellers who both issue and accept vouchers in return for goods or services. The only exception is where the redeemer pays VAT on the full face value of the voucher. VAT is also imposed on any intermediate trading in the vouchers. There is however provision for adjustment to the extent that it is known that the supplies for which the vouchers can be redeemed are entirely exempt or subject to zero or lower rates of VAT.
There is also a new anti-avoidance provision which applies in cases where a voucher is sold as part of a package and the price of the package would not be any less if the customer were not to accept the voucher. In such cases there will be no reduction for the voucher and VAT will be charged on the basis of the full price paid.
The definition of face value vouchers has also been extended to include electronic versions such as some mobile phone top-up cards and electronic ‘gift cards’.
Extension of powers to call for security for VAT liability
Customs & Excise already had powers to require businesses to provide security if they considered the business was involved in serious VAT evasion. These have been extended to allow them to require proportionate security from other businesses in the supply chain. The application of these powers appears to be completely at Customs & Excise’s discretion and they could create onerous burdens for a number of businesses.
Additional evidence for input tax deduction in absence of VAT invoice
The evidence which businesses in certain sectors will be required to submit in the absence of a valid VAT invoice is to be extended. The wording of the Finance Bill provides that regulations may be made which would allow non-documentary evidence to be submitted to support a claim for input tax. In the future Customs & Excise intends that in addition to evidence of supply, taxpayers should be required to submit evidence of the bona fide nature of the transaction. The trade sectors affected are those dealing in computers, telephones and equipment related to either of these, alcohol products and road fuels stored in bulk. The new regulations will not be introduced until a consultation process has ended but will then be backdated to apply from 16 April 2003.
New import and export civil penalties
Customs & Excise are to introduce two new penalties in respect of the import and export of goods to or from a place outside the EU. Previously the only sanctions in such cases were criminal so that these may actually be relatively beneficial to some businesses and they also appear to mark a welcome change in emphasis in this area.
A non-compliance penalty of up to £2,500 may be applied in respect of: occasional serious errors of at least £10,000 duty / import VAT; persistent failure to comply with regulatory obligations including low-level failures in declarations; or failure to correct deficiencies in systems, operations or physical security when directed to do so by Customs & Excise. The penalty will be preceded by a written warning and will not apply automatically. The second penalty is envisaged to be issued in lesser cases of fraud. The maximum rate will be the value of the duty and/or import VAT sought to be evaded. The measures are expected to be brought into effect in Autumn 2003.
Simplifications for small businesses
Increased thresholds for registration and deregistration
The registration and deregistration limits have risen in line with inflation, from £55,000 VATable turnover to £56,000 and from £53,000 to £54,000 respectively.
Embargo from penalties for notification of liability for registration
A one-off embargo is to apply to allow businesses that trade over the VAT registration threshold, but have not registered for VAT, to enter into the VAT system without incurring the normal penalty. The window for this “incentive” scheme will be from 10 April to 30 September 2003. The normal belated notification penalty will not be levied so long as the business pays any arrears of tax in full and remains complaint for 12 months after registration. Customs & Excise will to some extent be willing to negotiate the settlement of arrears.
Changes to the flat rate scheme
The flat rate scheme is a simplification measure to enable small businesses to calculate their net tax due by applying a flat rate percentage to their turnover. The percentage used depends on the trade sector into which the business falls and trades that would normally receive a high proportion of reduced, zero rate and exempt income will be taxed at a lower percentage.
The ceilings for the scheme have been increased: from £100,000 to £150,000 VATable turnover and from £125,000 to £187,500 total turnover. These changes were announced in the Budget 2002.
Minor changes have also been made to the trade sectors used to assign the percentage rates.
Increased threshold for the annual accounting scheme
The annual accounting scheme allows businesses to make one VAT return for a year instead of the usual four. Prior to the Budget it was available to businesses with a taxable turnover of up to £100,000; businesses with a turnover of up to £600,000 can also join once they have been registered for 12 months. The threshold for immediate entry will be increased from 10 April 2003 to £150,000.
Simplification of business gifts
The £50 threshold for exemption from VAT for business gifts will in the future apply cumulatively over the course of rolling 12 month periods. From 1 October 2003, VAT will be due on all gifts if the total cost over any 12 month periods exceeds £50.
Special scheme for non-EU businesses providing electronically supplied services to EU customers
From 1 July 2003, non-EU businesses providing electronically supplied services to non-business customers will be taxed in the country where the customer belongs. These businesses would therefore normally be required to register in every country in which they make supplies. The Budget changes, in line with the EU E-Commerce Directive, allow such businesses to register in a single Member State of their choice and to declare the total EU tax due on a single return to that State.
Relaxed import VAT security requirements
In a new measure which will benefit many importers, there is to be a relaxation of the current requirement to provide security for the full amount deferred VAT payments. Approved importers will from 1 December 2003 be able to provide reduced or nil security. Approval will need to be sought from Customs & Excise to benefit from the scheme. Details are subject to an ongoing consultation.