Issue 10
In this issue:
Business Briefs and Updates on HMRC Policy
Local Authority Issues
Recent VAT Cases
Business Briefs and Updates on HMRC Policy:
Business Brief 23/2005
Pre-Budget Report – VAT & Property developments.
The Government has announced consultations on the following topics:
- A rewrite of existing law in Schedule 10 to the Value Added Tax Act 1994
- the VAT treatment of Beneficial Ownership of land (Paragraph 8, Schedule 10, VAT Act 1994).
Copies of both consultation documents can be found on the HM Revenue & Customs website at http.www.hmrc.gov-uk.
The closing date for contributions is 28 February 2006.
Outcome of the “Future of the Option to Tax Consultation”
The option to tax was introduced with effect from 1 August 1989. From 1995, it was possible for an option to tax to be revoked after 20 years, subject to the written consent of the Commissioners being obtained.
The first options will therefore become eligible for revocation from 1 August 2009.
In order to help businesses plan for the future, HMRC are now announcing the proposed conditions under which written consent to revoke an option to tax will be given (together with changes to the other related issues covered by the consultation). The necessary legislation and guidance will follow in due course.
Revocation
Written consent for revocation will be possible by two routes, either
- Automatic Consent or,
- Permission Consent.
(i) Automatic consent
The Commissioners will automatically provide written consent once a taxpayer has “certified” that all the stipulated conditions are met. HMRC intend to make available a draft certificate on their web site although other formats will be acceptable if all the necessary information is provided. The proposed conditions that must be certified as met are that:
- No pre-payment has been made covering any supply of goods or services for more than the next 6 months following the date of revocation.
- No capital item is held (HMRC recognise that many properties may not fulfil this condition and so will be exploring a possible solution).
- Any rents charged have not been under-valued, and no balloon payments fall due at any time after the proposed revocation.
- The taxpayer held an interest in the property at least 20 years prior to revocation and that the property was subject to the option to tax at that time.
These conditions may be amended, deleted or added to with appropriate notice being given.
As well as certifying that the above conditions have been met, business will also be required to provide the following information on their certificate:
- A clear description of the property.
- Evidence of the date of the original option.
- Proposed effective date of revocation.
- A named authorised signature (Sole Proprietor, Partner, Company Secretary, Trustee, Director, or a signed letter of authority from one of these persons).
The effective date of the revocation will be the date of posting of the certificate.
(ii) Permission Consent
We would expect the majority of revocations would be by automatic consent. However, HMRC may still grant consent in cases where a business fails to meet one or more of the stipulated conditions of automatic consent, provided that it does not gain a tax advantage other than future supplies of the property being VAT-free. An example might be where a taxpayer meets all the conditions for consent except that they have a pre-payment in place for the next 5 years cleaning services. If at the time the input tax was incurred on the cleaning services, the taxpayer apportioned the input tax so that only the input tax relating to services used before revocation was recovered, then HMRC would still grant consent. Further examples will be included in guidance in due course.
In any application for permission consent, business will need to provide the following in the form of a certificate:
- A clear description of the property.
- Evidence of the date of the original option.
- Certification of those conditions in (i) above that are met.
- Full details of the conditions in (i) above that are not met and why consent should still be granted.
- A named authorised signature (Sole Proprietor, Partner, Company Secretary, Trustee, Director, or a signed letter of authority from one of these persons).
If HMRC agree to revocation in a permission consent case, the effective date of the revocation of the option will be the date of HMRC’s letter agreeing to revocation on completion of their consideration of the individual circumstances and acknowledged acceptance.
(iii) Error correction and penalties
If any information provided on a certificate is subsequently found to be incorrect, HMRC will be able to restore the original option with effect from the date of revocation. They will always take such action where written consent to revoke an option would have been refused if the correct information had been provided. This restoration of the option will make all supplies that have been treated as exempt from the date of revocation taxable and subject to an appropriate VAT assessment plus interest.
Where an incorrect certificate is issued, either due to lack of care or deliberately, a penalty will be applied. The development of appropriate forms of penalty is being considered as part of the wider review of HMRC’s powers and appeal rights. Further guidance on these penalties will be provided once this work has been completed.
(iv) Re-options
We can foresee situations where, after revocation has taken place, the business wishes to reinstate the option on the property. There will be no cooling-off period allowing the original option to be reinstated, but there will be nothing to prevent the business making a new option on the property. Any new option will be subject to the rules and anti-avoidance provisions in force at that time, and will start a new 20-year period before it can be revoked.
(v) Early Revocation
Providing certain conditions have been met, current legislation allows businesses to revoke an option to tax in the first three months after electing. The Government intends to increase this period to 12 months, subject to the same conditions as currently apply.
While HMRC have so far been unable to identify a fair method of early revocation (ability to revoke after 12 months but before 20 years) they will continue to explore options.
(vi) Position of tenants
It is not proposed to impose a condition requiring a landlord to inform a tenant that they have revoked their option.
Other items are included within the Business Brief, such as the creation of Universal Otions to Tax to replace Global Options and a change in the current policy allowing separate treatment of land and buildings.
Local Authority Issues:
a) Capital Expenditure and Voluntary Aided Schools
It appears that there may be confusion following the guidance issued in September 2005 regarding funding of voluntary aided schools' capital expenditure by the LEA.
Importantly, HMRC have already agreed that where LEAs 'donate' funds to VA schools' capital projects, they may recover VAT to the extent of their donation until a review is completed. Therefore, paragraph 15.5 of Notice 701/30 still applies: where an LEA decides to fund work for which the governors are responsible, they can recover the VAT.
The September 2005 guidance was prepared to address a different issue, that resulting from the DfES' redefinition of those expenses which voluntary aided schools governing bodies, as opposed to Local Education Authorities (LEA), are responsible for. These changes primarily relate to capital expenditure. The guidance simply set out what DfES defines as capital expenditure in response to an issue raised by an LEA.
This reclassification of capital expenditure by the DfES is important because, once delegated funds stop being used to pay for capital works, LEAs are no longer able to recover the VAT incurred on such expenditure as the monies are no longer being spent by VA governing bodies on an agency basis.
At the time the draft guidance was prepared HMRC did not have a particular implementation date in mind. This because given the date the DfES changes took legal effect - 1 April 2002 - it appeared that LEAs had ceased being required to fund this work from the delegated budget for more than 3 years .
On this basis one would not have expected VAT to be recovered by LEAs because, from the date of the DfES changes, LEAs funding for such capital works would not have been included in the delegated budget formula by LEAs. Rather the work was to be funded entirely by the DfES and the governing bodies themselves.
There may be situations where LEAs had been involved in direct funding some long term capital expenditure at schools prior to the rule change and it has been agreed with DFES that this could continue until the project finishes. If such situations do exist, HMRC would be content for the LEA to continue to recover the VAT until the relevant works are complete.
b) VAT on Mileage Claims
HMRC has announced that the revised rules relating to the claiming of input tax on mileage claims paid to employees, members and voluntary drivers will not come into force for S33 bodies until 1 April 2006.
From that date it will be requirement to hold a VAT invoice to support the claim for VAT recovery. This invoice should evidence as a minimum, sufficient fuel purchased to cover the journeys being reimbursed and should be for a fuel purchase in advance of the journeys being claimed.
It is recognised that there may be little correlation between the amounts shown on the invoices and the VAT element of the fuel allowance claimed by employees. In view of the difficulties HMRC are prepared to look at the position for each employee over the period of a year, for example, and provided there are sufficient invoices to cover the petrol for the mileage claimed for the year as a whole, this will be acceptable. This may mean that an invoice may span more than one expense claim where the individual does not use their vehicle on a regular basis.
Recent VAT Cases:
a) Isle of Wight car parking case – Tribunal decision
Many of our regular readers will be aware that the judgement of the tribunal in this case has been long awaited. It affects all Councils making charges for off street parking which have been viewed by HM Revenue & Customs as subject to VAT.
On 23rd January 2006 the Tribunal issued its decision ruling in favour of the four Councils which had taken the case.
Most Councils have submitted protective claims for VAT overpaid on these charges and the result of the case now raises the prospect of local authorities receiving refunds of VAT amounting to £350m - £500m in total. This could have a significant impact on Council Tax levels in some areas.
Please contact us for further information or to discuss your claim for overpaid VAT.
We await a response from HM Revenue & Customs by way of a Business Brief. In the meantime the Department has a period of 56 days in which to make an appeal against the decision of the Tribunal.
b) Court of Appeal – Fleming (Trading as Bodycraft)
The Court of Appeal has ruled that the time restrictions imposed on businesses who seek to recover output tax over-declared or input tax under-declared on previous VAT returns are not restricted by the three year capping provisions. The Court ruled that the transitional period, which is a requirement of any capping provisions, was introduced by a Business Brief which in their opinion is not the correct way of implementing such a transitional period.
Theoutcome of this is that claims for over-declared output tax will remain uncapped until a valid transitional period is introduced by primary UK legislation. This may also hold for input tax claims and S33 claims.
For further information regarding any of these articles or any other VAT issue, please phone us on 01962 735350 or e-mail us at: vat@thevatconsultancy.com
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