HMRC has published its summary of responses to the VAT: Addressing borderline anomalies consultation. HMRC has made little in the way of changes to the original proposals beyond the headlined pasty tax and caravan changes.
From 1 October 2012 supplies of self-storage facilities will be standard-rated regardless of whether the supplier has exercised its option tax. The Government is pressing ahead with the changes however it should be noted that we understand that some of the larger operators are preparing to mount a legal challenge to the standard rating of self-storage after the law takes effect in October.
In the meantime, the Government has however made a welcome change to the proposals for smaller operators.
A supply of self-storage will be taxable from 1 October, and VAT on associated costs will be recoverable. However, the majority of input tax incurred would have been incurred up front on the fit out of the premises and as the supplies at the time would have been exempt, none of the associated VAT would have been recovered. The Capital Goods Scheme (CGS) will enable businesses that spent more than £250k on refurbishments, construction of a premise or even the cost of the land to revisit the VAT recovery and if the VAT was incurred in the last 10 years then partial recovery will be possible (the CGS looks at use over a 10 year period).
The issue here is that small businesses may have incurred less than £250k on the fit out and would therefore miss out on using the CGS. HMRC has accepted this point and from 1 October, the CGS will be extended, for self-storage facilities only, to cover capital expenditure of less than £250k. This is welcome news for small businesses and it is well worth considering when fit-out/construction costs were incurred and whether there is now an opportunity to recover some of the VAT that was irrecoverable when incurred.
Small Businesses involved in the supply of self-storage facilities should also consider whether the flat rate scheme may be beneficial for them as it is possible to use the flat rate scheme and also recover VAT on capital expenditure.
HMRC has issued a response document to the consultation process on the VAT changes introduced in the Budget. This is the first in a number of updates which we will be issuing on the issues addressed within this 57 page document and how the VAT changes are now to be introduced.
As far as the changes to the zero-rate on approved alterations to listed buildings is concerned the document contains some good news on the transitional period.
The document summarises the points made by many respondents within the charity, care and building sectors as well as individuals owning listed properties. It then outlines revised qualifying conditions and an extended transitional period.
Zero-rating will now be allowed for eligible approved alterations on projects where listed building consent had been applied for before 21st March 2012 (not just where a signed written contract was in place before Budget Day) and these projects will continue to benefit from zero-rating on works completed to 30th September 2015.
VAT Director, Steve McIntyre sees this as good news for all who are undertaking listed building projects as it allows a more acceptable period of time in which projects will continue to benefit from zero-rating, even though the measure to remove the zero-rating on approved alterations will remain.
Karen Mulcahy, Senior Manager, further comments that nevertheless, there will be a number of interested parties who will disappointed that the proposed measures have not been subject to the ‘u-turn’ that other measures have benefitted from.
In addition, we are also still waiting for further detail on the revisions to the Listed Places of Worship scheme.
If you want further detail on this item or any other VAT issue please call The VAT Consultancy on 01962 735350.
In last month’s Budget, the Chancellor announced a restriction to the zero rate for caravans, to be effective from 1 October 2012. The measure seeks to remove the zero rate from caravans which are not specifically designed and /or used for residential purposes, and therefore proposes to restrict the zero rate to caravans meeting British Standard 3632 or equivalent. This means that caravans which either do not meet the pre-requisite British Standard or equivalent standard or are not used for all year round residential purposes will no longer be able to benefit from the zero rate.
In practice this means that the zero rate will, from 1 October 2012, only apply to caravans which meet the British Standard and are sited at a location which permits all year round residential use, i.e. where the caravan is sited at a location which prevents all year round occupation, the zero rate will not apply, even if the purchaser regards the caravan as his or her principal private residence. This has the potential to create additional costs for the caravan owner where a caravan is located at a site that prevents all year round occupation, and could lead to different treatments for different tax regimes, e.g. Council Tax and Capital Gains Tax. Nevertheless, the onus will be on the seller of the caravan to apply the correct VAT treatment, and will likely, in cases of doubt, lead to VAT being charged on all sales of caravans, irrespective of their intended use or location. This brings further potential issues for caravan retailers in determining the price. Given that consumers are only likely to be prepared to pay a certain maximum price for a particular model, retailers are unlikely to be able to simply add 20% VAT to the forecourt price. This being the case, consumers are likely to resist a 20% price inflation, and any attempt by the retailer to absorb the price increase will adversely impact on profit margins.
As above, it is not just the caravan itself that needs to meet the relevant criteria; there is also a purposive test. I.e. it is not enough that the caravan meets the British Standard criteria, the caravan must also be purchased for and be capable of being used for all year round residential use. This is considered to mean that any caravan purchased for delivery to a site with residential restrictions, will not achieve the zero rate on its purchase. Nevertheless, where that site includes some all year round residences, the site owner can still benefit from the zero rate for related civil engineering works.
Caravan and site owners beware!
NB – These proposals apply to the actual caravan structure and items ordinarily fixed to caravans. Removable contents from caravans are already subject to VAT at the standard rate.
For further information on this matter contact Karen Mulcahy on 01962 735350.
With the unexpected news in last month’s Budget announcing the removal of the zero rate for alterations to protected buildings, our resident VAT and property experts Karen Mulcahy and Sarah Franklin will be holding a FREE webinar on Thursday 19th April at 12.00 midday to discuss the practical implications of these changes.
Aimed at Architects, Property Developers and anyone who is currently involved in or advising on a project of this kind, you will:
- Find out the specialists’ view on the proposed changes
- Understand the implications for you or your clients’ projects
- Opportunity to join the discussion
- Take a part in responding to the consultation document
To register your place click here
The changes announced to the VAT treatment of certain food items in last week’s Budget confirm that HMRC are now seeking to extend standard rating to food provided in the course of catering to the customer. This is in two situations:
- where food is sold at above ambient air temperature; and,
- where food is sold to be consumed in areas set aside for this, whether the seating/eating areas are provided solely by the producer of that food or if shared with customers of other food suppliers.
The reason for these proposed changes is stated to be due to a number of mainly successful challenges by businesses which would otherwise have to charge VAT on their sales of “hot takeaway food” or on food consumed outside their premises.
In particular, bakeries and supermarket outlets have been able to zero-rate their sales of products such as hot pies, hot meat products, toasted sandwiches, etc. This was primarily due to interpretation of the current VAT legislation, where food had been heated “for the purposes of enabling it to be consumed at a temperature above the ambient air temperature”. Many businesses successfully argued that the prime purpose of the heating was not for the food to be consumed at a particular temperature, but rather to comply with health and safety regulations and/or for appearance enhancement purposes.
Certain detrimental socio-economic effects are likely to be seen as a result of this change. These include:
- The imposition of VAT on certain basic foodstuffs at a time when retail prices are rising faster than average incomes.
- Increasing pressure on food producers by retailers who cannot pass on the (full) 20% increase to their customers and will be looking for considerable price reductions from their suppliers. This may cause businesses to fold as they will no longer be able to make a sufficient margin to survive.
- Encouraging businesses to keep the “ambient air temperature” of their outlets higher so that the temperature of “freshly baked food” is the same as or less than this.
The question arises as to how will HMRC define “freshly baked” bread? Would this include products requiring “bake off” by the retailer, as happens in many supermarket outlets currently, and flatbreads and similar staple bread items baked or otherwise created from a heating process pre-sale?
The definition of “premises” has also been clarified by HMRC. Currently, food (hot or cold) consumed on the premises on which it has been supplied is treated as being supplied in the course of catering and thus standard rated. However, the new definition includes food consumed in “any area set aside for the consumption of food by that supplier’s customers”, even if other suppliers’ customers can also use the area. This will cover food courts, tables and chairs outside restaurants and cafes, areas set aside for eating in airports, ports, railway stations, motorway service stations, theme parks, shopping centres, etc.
- Would there again be a differential VAT treatment where there are public seating areas, e.g. wooden benches for the purpose of seating- rather than for the consumption of food – located closer to the retail outlet than any area designated for eating?
- How can the staff at such outlets easily identify where the customer will go to consume the items purchased, and thus the correct VAT treatment, once the customers have left the premises? It might be nearer (and cheaper!) for customers to return to their place of work to consume the food, e.g. an office located next to a sandwich shop, rather than to sit in a “general” eating area which may be some distance further.
- Will the term “premises” include the whole of an airport or theme park?
- Will HMRC introduce a “distance test” to determine how far a consumer must take their food purchases to have them treated outside the confines of “supplied in the course of catering”?
We await the outcome of the consultation process on this with interest. In the meantime, if you would like to discuss this further, please contact Marianne Hawksworth on 01962 735350.
We’ve now had the chance to review the VAT changes announced in the Budget and most importantly to consider the commercial impact of these. The proposed changes that are highlighted in the Consultation Document ‘VAT: Addressing Borderline Anomalies’ , all purport to remove anomalies and level the playing field by removing zero rating or exemption for a number of areas including the sale of hot take away food, approved alterations to listed buildings, sports drinks, self storage and a number of other areas. This follows a trend seen elsewhere in the EU where the tax authorities/governments appear to be tinkering around the edges with zero rates and exemptions having already raised the standard rate of VAT in many cases.
It is clear from press coverage over the past few days and also from discussing these changes with businesses in the industries affected that the changes were largely unexpected and took businesses by surprise – not helpful in the current climate. Perhaps more surprising is the fact that the Impact Assessments almost entirely fail to consider the impact of the changes on the wider supply chain. Many manufacturers operating in the industries affected by the changes will have profit margins seriously eroded or wiped out entirely as a result of a rate change from 0% to 20% when the product is sold in a retail environment. This could impact on jobs. The Impact Assessments focus on the impact on the consumer, failing to recognise that businesses cannot always simply raise their prices by the relevant VAT amount – the market may not bear this price and the consumer could switch to an alternative product, regardless of whether this is also standard rated.
The rationale for the changes is stated as being focused on simplifying matters, but to pick on the easiest target in the proposed changes, it is difficult to see how a business is going to be able to monitor the temperature of a pie when sold to a customer – standard rated if just out of the oven and zero rated half an hour later for a different customer once it has cooled down. Many more questions arise in relation to the specific measures, and hopefully comprehensive comments illustrating the commercial difficulties will be provided to HMRC as part of the Consultation. The changes will achieve the goal of raising additional revenues but it remains to be seen as to what the hidden cost to niche industries will be.
To discuss this further please contact Julie Park on 01962 735350.
Yesterday’s Budget announced changes to remove the zero rate for alterations to protected buildings (mostly listed residential dwellings but also listed buildings used for charitable and other residential purposes). Whilst there was some speculation of a reduced rate being applied to all works to listed buildings at some point in the future to simplify the rules (rather than some at the zero rate and some at the standard rate), we had not expected works of approved alterations to become taxable at the standard rate.
Whilst the zero rate of VAT is being retained for substantial reconstructions of residential listed properties, the definition of ‘substantial reconstruction’ is being revised. The effect is to limit the zero rate to works which amount to demolition and reconstruction from a shell.
Listed places of worship will also be affected, and whilst the Listed Places of Worship refund scheme (operated by the Department for Culture, Media and Sport) is to be extended for approved alterations subject to VAT at the standard rate of VAT, there is no indication that the funding for the scheme is to be extended.
There are transitional arrangements in place where owners of listed buildings and developers have already entered into binding contracts for approved alteration works and associated construction materials prior to Budget Day. For approved alteration works where a signed contract is in place before Budget Day, works specified in that contract (allowing for minor amendment) continue to benefit from the zero rate if performed up to 20 March 2013 (1 year after Budget day). Any works performed after that date will be standard-rated.
HMRC are inviting comments on the draft legislation from businesses affected by these changes. The consultation period runs from 21 March 2012 – 4 May 2012.