Local Authority Newsletter – February 2011 

 The following is a brief outline of recent changes announced by HMRC, recent cases from the Courts & VAT Tribunals and other updates on VAT issues of particular interest to Local Authorities.  We trust you will find it informative.  If you have any queries regarding any of the following or wish to discuss any issue please do not hesitate to contact a member of our Public Sector Team whose details appear below.  

1 January 2011 Changes 

1)      VAT Rate Change! – see HMRC’s extensive guidance note published 22 June 2010. 

2)      Cross Border Changes for B2B supplies of cultural, artistic, sporting, scientific, educational, entertainment and similar services 

From 1 January 2011, admissions to cultural, artistic, sporting, scientific, educational and entertainment events, and services ancillary to admissions (such as cloakrooms) will remain taxable where the event takes place, whereas other supplies in these areas will revert to the basic B2B rule (i.e. taxed where customer belongs).  These include services such as organising events.  

Admission covers any payment that gives the right to attend an event even if it is covered by a season ticket or subscription. This includes payment to attend conferences, exhibitions and seminars even if they are of an educational nature.  In-house events will fall within this rule as well as open events. 

Business to consumer supplies (B2C) will be unaffected. 

3)      Lennartz Accounting and CGS changes – HMRC Brief 53/10   

The Brief clarifies the definition of non-business use as being ‘private use’ for the purposes of Lennartz accounting.  This should not therefore affect LA’s. 

The Lennartz mechanism which allowed full recovery of VAT up front on assets used both for business and non business purposes with a non business usage charge over a period of time, is now no longer available except in very few cases.  The Brief announces that wef 1 January 2011, taxpayers buying land and property, ships, boats, other vessels or aircraft will be permitted to claim VAT only to the extent that the asset is used for business purposes, subject to any partial exemption restriction. 

However, to ensure a fair recovery of VAT if use changes, ships, boats and other vessels and aircraft costing £50,000 or more will now be included in the Capital Goods Scheme (CGS). 

The scope of the current CGS has therefore also been widened so that it not only caters for changes between taxable and exempt business use (as now) but also for changes between business and non-business (private) use of assets.  Local Authorities should continue to monitor usage of any CGS items and include any items which now come within CGS as listed above.   

 
Other Recently Announced Changes  

HMRC Brief 51/10 – VAT – change in treatment of business samples 

This Brief is relevant to VAT registered businesses that give away samples of their products.  The UK’s restriction of allowing only one sample to be supplied to one person free of VAT has been removed. This follows the decision of the European Court of Justice (ECJ), in the case of EMI (C-581/08) on 30 September 2010. 

The Brief provides useful examples of what they will accept as a sample.  

HMRC Brief 50/10 – VAT: Proposed changes to the option to tax for supplies of land and buildings (anti-avoidance rule). The introduction of a new ’2 per cent occupation rule’ 

The mechanistic nature of the anti-avoidance test has resulted in concerns about the effect of the measure on certain transactions. Following representations to HMRC the test was amended from 1 April 2010 and a new ’10 per cent occupation test’ was introduced, whereby occupation of no more than 10 per cent of a building by a person providing finance for its purchase or development is ignored. 

HMRC have now been made aware of instances where minor occupation by the grantor (or a connected person of the grantor) can cause an option to be disapplied even though there is no deliberate attempt to avoid tax. The proposed change addresses that concern by introducing a further ’2 per cent occupation rule’ applicable where the grantor himself or a person(s) connected to the grantor is to be in occupation. The new rule is in addition to the existing 10 per cent rule and does not replace it 

For the purposes of calculating the percentage of the building occupied by a particular person the practices set out in the RICS ‘Code of Measuring Practice’ are to be used. 

The other change proposed relates to ATM’s, in future, occupation of land which is solely by reference to ATMs will not be treated as occupation for the purposes of the anti-avoidance test. 

HMRC Brief 49/10 – VAT: proposals to simplify the ‘change in use’ provisions 

This Brief announced a four week consultation period to consider proposals to simplify the ‘change in use’ provisions (Paragraphs 35 to 37 of Part 2 of Schedule 10 to the Value Added Tax Act 1994). 

From the date of implementation, the legislation will no longer have two adjustment mechanisms (each with its own rules on how to calculate and apply a tax charge) to apply to the two sets of circumstances where a ‘change in use’ occurs. 

Instead, there will be a single adjustment mechanism to be applied in all circumstances. It will be based on the: 

 - amount of VAT that would have been chargeable on the original supply (or supplies) had the building in question not been eligible for the zero rate 

 - proportion of the building that is affected by the change in use 

 - number of complete years that the building has been used solely for a qualifying purpose prior to the change in use 

Before the rental to a third party for business purposes and the own use of the property for business purposes would have been calculated differently.   The new proposals mean the same one-off charge will occur. 

HMRC Brief 40/10 – VAT: supplies of nurses, nursing auxiliaries and care assistants by state regulated agencies 

This Brief announces a consequential amendment to the nursing agency concession (previously detailed in HMRC Brief 12/10) that allows VAT exemption of certain services provided by nursing agencies (the Nursing Agencies’ Concession). 

With effect from 1 October 2010 (as a result of changes announced in the Health and Social Care Act 2008), the legal requirement for nursing agencies to be registered under the Care Quality Commission will cease and responsibility for quality standards will pass to those organisations that provide the regulated activity. 

This consequential amendment ensures that nursing agencies that currently benefit from the concession continue to do so from 1 October 2010. 

From 1 October 2010 therefore, to qualify for the concession, the employment business must be registered with one of the following organisations: 

 - Care Quality Commission (or for supplies on or after 1 October 2010 would have been required to be registered with the Care Quality Commission prior to that date) 

 - Scottish Commission for the Regulation of Care 

 - Care Standards Inspectorate for Wales, or 

 - Northern Ireland Health and Personal Social Services Regulation and Improvement Authority. 

The Minister for Schools has announced that legislation will be brought forward in 2011 which will enable Academies to claim VAT incurred on purchases made to support their non-business activities (principally the provision of free education).  This will put them on the same footing as other schools run by local authorities.  

A new section 33B of The VAT Act will be introduced and will have effect for supplies made on or after 1^st April 2011.  The VAT refund mechanism will be the same as that for Local Authorities (i.e. that the Academy will be registered for VAT if it has any business activities and render VAT returns or make claims for its non business input tax on a form similar to those submitted by non registered Parish Councils).  The partial exemption de minimis limit for Academies will £7,500 per annum (in line with that for businesses and charities) as the provisions of Section 33(2) have not been included within the new Section 33B. 

There still remains the issue that VA Schools will be treated differently with regard to recovery of VAT on capital works, including those projects still to be undertaken as a result of the BSF programme.    

Land Decontamination Costs  

HMRC has confirmed that where a local authority clears land of contamination this is regarded as part of the local authority’s environmental responsibility. Any associated costs can be disregarded for the purposes of partial exemption, even if the land is subsequently disposed of by way of an exempt supply. 

This is welcome news and will avoid the need to opt to tax land where significant decontamination costs are to be incurred prior to sale. 

Isle of Wight Case – latest round 

The ECJ had referred this case back to the UK Tribunals after ruling that a ‘distortion of competition’ should be considered in light of the supply and not restricted to a local market in particular.  The full hearing is now set for March this year.  HMRC have been contacting Councils asking them to update claims more regularly.  This issue has been taken up by the CIPFA VAT Committee to see if HMRC will accept informal updates rather than the necessity of making claims which are then refused and have to be formally appealed, which is time consuming for all involved.   

Receivership Fees 

When a local authority officer is appointed under the Mental Health Act 2005 as a ‘deputy’ to look after an individual’s financial affairs, such fees are outside the scope of VAT.  HMRC has recently confirmed that also, where a local government officer is appointed by the Court of Protection to undertake a guardianship role on behalf of a person who is no longer capable of looking after their own affairs, the employing local authority is not engaging in a business activity for VAT purposes.    

Leasing to providers of early year services 

Where a local authority leases a property to a provider of ‘early years’ services, falling under the Childcare Act 2006, on a cost recovery basis and the conditions in HMRC Internal Guidance V1-14, s. 10.2 are met, the supply by the local authority can be treated as non-business.   This means that, like children’s centres, VAT incurred by local authorities on the construction of properties leased to service providers on this basis, can be excluded from their partial exemption calculations. 

Early Years includes children up to age 5 and therefore includes nursery, pre-schools and nursery schools. 

Purchase of EU emission trading system credits 

The question of the VAT treatment of reimbursements between local authorities and academy schools has been raised with HMRC.  

At present a large-scale user of electricity must purchase enough CRC allowances to cover their use (for a local authority this will cover their use and that of academies in their area).  LA’s are entitled to seek reimbursement from the academies for their share.  

HMRC’s initial view is that as the local authority has a statutory duty to obtain sufficient allowances then the reimbursement between the academies and LA would not be any consideration for a supply.   We await HMRC’s formal view on this matter.       

Waste Disposal  

The liability of the charge between a waste disposal authority and a waste collection authority is outside the scope.  This is because waste disposal is regulated by public law and a LA is the only body that can undertake the activity.  Authorities that have treated this as taxable may continue to do so up to 30 March 2011 before making the necessary changes, this should ensure no 5% partial exemption issues arise from the clarification. 

Property Search Fees  

The issue of whether these should be non-business rumbles on.  Apparently a private search company has complained to HMRC as it has to charge VAT.  The CIPFA VAT Committee will be making representations to HMRC who are considering the standard rating of such fees by Local Authorities from 1^st April 2011.   

VAT Cases 

OM Properties Investment Co. Ltd (TC 00752) 

In the above Tribunal case the issue was the insurance charges to tenants of commercial properties which have been opted to tax.  The landlord insured the properties under a block policy and extension to the insurance BUT the charge for insurance should have followed the VAT liability of the rent being charged which is standard rated.  This has always been the case and is again confirmed by the Courts. 

Airtours HolidayTransport Ltd 

The Upper Tribunal has allowed an appeal by HMRC against the decision of the First-Tier Tribunal that VAT charged to the tax payer by Accountants in respect of fees relating to a tripartite agreement was deductible as input tax by the tax payer.  The Upper Tribunal agreed with HMRC that the input tax charged by the Accountants was not input tax to Airtours but was in fact input tax to the Banks and other institutions who had instructed the Accountants to provide their services. The moral of the story is that while you may pay for a service, you may not necessarily be entitled to the input tax, particularly where there are tripartite agreements in place.  

Express Food Supplies 

This was an appeal against a penalty that was imposed by HMRC in respect of an inaccurate VAT Return, the mistake being made by the tax payer’s temporary book-keeper HMRC deemed the error to be careless. The prompt disclosure however did not affect the decision and the Tribunal upheld the penalty assessed at 15% of the potential lost revenue. This is the first case we have seen of a careless error attracting a penalty. 

If you would like any further information on the above topics please call Steve McIntyre, Zaenia Rogers or John Crawford on 01962 735350 or email on:  vat@thevatconsultancy.com