Channel Islands: Case against LVCR legality issues lost
Following our blog of November 14 2011 noting that questions were being raised about the legality of the UK blocking low value consignment relief (LVCR) only on goods entering the UK from the Channel Islands (and not from other non EU locations), these legal challenges have now failed.
Jersey and Guernsey lost their cases after three days in the High Court to try to stop the UK Treasury ending LVCR. The islands were also ordered to pay half the UK government’s legal costs. Both island governments are considering an appeal.
Giving Channel Island ministers permission to challenge his ruling, the judge said the EU was a “complex organism” and the case covered a “difficult area”. However, Mr Justice Mitting said there was no legal requirement that the UK government should treat one territory the same as another.
The trade is worth hundreds of millions of pounds a year and approximately 1,500 workers in Jersey and about 600 workers in Guernsey could lose their jobs.
The decision, which will see the UK government end the tax relief to the Channel Islands from the start of April 2012, is expected to have a significant impact on the economies of both Jersey and Guernsey.
For advice on this or any other VAT matter contact Sarah Franklin on 01962 735350.
VAT victory for law firms
Law firms may be interested in the recent First-Tier Tax Tribunal decision in the case of Barratt, Goff and Tomlinson in which the Law Society also made representations. Zaenia Rogers, Consultant, takes a look.
The appellant law firm had treated the recharge of medical reports and medical record fees to its personal injury clients as outside the scope of VAT as a true VAT disbursement. HMRC took a contrary view and considered the recharges to be further payment for the lawyer’s supply of legal services. On that basis, the recharges would be subject to VAT at the standard rate and an assessment was therefore raised by HMRC and was the subject of the appeal.
The chairman in this case was satisfied that the lawyers were acting as agent for the client when obtaining the reports, as the facts showed the client could purchase the reports directly, that the client effectively had rights and access to the reports, and they could also settle the fees directly themselves if they so wished. The use of a ‘suspense’ account to pay these fees where the lawyers settled the fees on the individual’s behalf was also critical to the judgment, although in reality this purely meant using their own business account as opposed to the client accounts they may have had. All these facts resulted in the chairman concluding all the disbursement rules as set out in Public Notice 700 para 25.1 were being correctly met.
The case is still in time for an appeal by HMRC but those affected may wish to consider protective claims now. However, as with similar VAT refund claims, where clients have been charged incorrectly it is likely that the ‘unjust enrichment’ rules will hinder any windfall for legal firms.
Get in touch: zaenia.rogers@thevatconsultancy.com or call on 01962 735350.
VAT treatment of Local Authority commercial waste collection services
We’ve received many queries recently via our website regarding the VAT treatment of commercial waste collection services provided by Local Authorities. Following a review by HMRC, they have announced via the Chartered Institute of Public Finance & Accountancy (CIPFA) that these services will no longer be taxed at the standard rate but will fall outside the scope of VAT.
As a result Local Authorities no longer need to account for VAT where they make such charges and now have the opportunity to make a claim for overpaid VAT on these services going back four years. And, if you included a claim for VAT on these services within a Fleming claim, then we recommend that you contact HMRC on this aspect.
If you need any assistance on this matter please get in touch with me, steve.mcintyre@thevatconsultancy.com or call me on 01962 735350.
VAT and Travel – EU playing field levelled
The European Commission has published a press release regarding the infringement proceedings against a number of Member States in relation to the way in which they have implemented the TOMS legislation – click here for details.
TOMS is the VAT margin scheme for the travel industry and is effectively aimed at retail as opposed to wholesale transactions where the travel business acts as principal. The Member States named in the attached (and some others historically) apply TOMS to both retail and wholesale transactions which has lead to an imbalance in treatment between Member States.
For example, a UK established tour operator selling a French package as principal on a wholesale basis would not be required to account for UK VAT under TOMS as the UK correctly does not subject such transactions to TOMS. As far as HMRC are concerned, the normal VAT rules apply, so the majority of the supply (eg the accommodation element) is subject to VAT in France. However if the UK business tried to VAT register in France to account for French VAT, the French Tax Authorities would not require them to do so on the basis they would regard them as a tour operator accounting for UK VAT under TOMS. This means the transaction is not subject to VAT (although the French VAT incurred on the purchase of the hotel would clearly be irrecoverable). If a French tour operator had sold the same package on a wholesale basis it would have had to account for French VAT under TOMS, hence the imbalance.
The impact of the impending changes could mean certain wholesale tour operators established in the UK (and some other Member States operating TOMS correctly) face an increased number of VAT registration liabilities in the EU and a corresponding increased VAT and compliance cost.
If you would like further information on this and other travel VAT issues contact Julie Park, julie.park@thevatconsultancy.com or on 01962 735350.
HMRC abuse challenge fails again
There has been another success for the taxpayer in fighting allegations of artificial contractual arrangements to avoid VAT.
HMRC challenged the arrangements Lower Mill Estates had put in place which involved two separate but connected companies making supplies in relation to holiday homes – one supplied standard rated land with planning permission and the other supplied zero rated construction services. If a single supplier had supplied the completed holiday home the entire amount payable by the purchaser would have been subject to VAT at the standard rate. The Upper Tribunal essentially found that there was sound commercial rationale for structuring the contracts in this way. HMRC regularly raise abuse challenges of this nature following their success in the Halifax case.
We are aware of numerous situations in which this is happening but with limited success if the case goes to litigation. More worryingly there appears to be a significant increase in abuse challenges in relation to ‘mixed supplies’, eg where a package of standard rated and zero rated items is sold for a single price. The exhibition industry has been targeted for providing entrance to an event with a zero rated publication.
Whilst the commercial rationale for every business will differ, the Lower Mill Estates decision does seem to reinforce the findings of much older VAT decisions such as Telewest in supporting the view that you cannot force a single supply for VAT purposes from two separate suppliers, provided they are operating on an armslength, commercial basis and have sound business rationale for doing so.
Businesses that supply packages consisting of standard and zero rated/exempt items would be well advised to review the VAT treatment applied to ensure there is no risk of challenge and equally to ensure the business is not unnecessarily over accounting for VAT.
If you would like to know about these issues then get in touch with Julie Park – julie.park@thevatconsultancy.com or call her on 01962 735350.
How the VAT rise is a blessing in disguise if you operate the Flat-Rate Scheme
The recent rise in VAT has brought to light the benefits of the flat-rate scheme with many self-employed people and SME’s actually profitting from operating it
. We’ve put togther our guide to help you work through the benefits and potential pitfalls of using the flat rate scheme.
What is the Flat Rate Scheme (FRS)?The Flat Rate VAT scheme was introduced in 2002 and is available to all small businesses or sole proprietorships. The FRS differs from standard VAT accounting as you pay a percentage of turnover rather than paying VAT on the difference between sales and purchases. So, while you continue to charge clients the newly introduced 20% VAT rate, you can potentially give a smaller percentage to the taxman. The FRS rate differs from sector to sector but for IT contractors the norm is 14.5%.
What are the advantages of the FRS?The FRS helps to simplify VAT calculations and record keeping. This is particularly helpful to smaller organisations that may not have the time or expertise to conduct their accounting in the traditional way (and, bearing in mind the increasingly severe penalties that can be charged for errors, this can only be a good thing). It shortens the process, removing the need to keep a record of VAT charged for each individual sale or that paid on purchases. However, you do still need to show a VAT amount on each sales invoice.
It might also save you money, for example:
Standard VAT CalculationTotal Billings £50,000
Output VAT 20% £10,000
Total invoiced £60,000
VAT reclaimed through purchases £750
Total payable to HMRC £9,250
Flat Rate Scheme CalculationTotal Billings £50,000
Output VAT 20% £10,000
Total invoiced £60,000
Total payable to HMRC at 14.5% of T/O £8,700
In addition, if you are in your first year of business you can benefit from a 1% reduction to your FRS rate.
Who Stands To Benefit From The Flat Rate VAT Scheme?Largely contractors are likely to benefit from the scheme, though this depends on turnover and expenses as the higher your sales turnover, the more likely it is to be beneficial.
Whilst the rates increased on January 4 2011, reducing the possible profit made, there are still many people who could benefit.
The rates alter depending upon your business, ranging from 4% to 14.5%. For those working in computer and IT consultancy or data processing the rate has increased from 13% to 14.5%.
Visit the the FRS page on HMRC’s website to find out your flat rate.
What are the disadvantages?There are rules and exceptions governing the Flat Rate Scheme. For example if your turnover is more than £150,000 per annum, you will be unable to take part.
If you make use of the scheme, you cannot reclaim VAT on purchases, except in certain circumstances. As a result, the FRS works best for people who have few expenses compared to their fee income. VAT on expenses can only be recovered if they are capital items costing £2,000 or more or if the assets are still within the business on the date of registration.
How do you apply for the FRS?The Flat Rate Scheme can commence at the beginning of any VAT accounting period and it is very easy to change tax programmes. Simply download an application form from the HMRC website and post it to them.
Any other tips?Work done for EU businesses is outside the scope of UK VAT and is therefore excluded from the Flat Rate Scheme calculations
For more advice contact us on 01962 735350 or follow us on twitter: @vatconsultancy.
The 12 VAT rules of Christmas – Day 7
On the seventh day of Christmas….
- If you’re looking for ways to keep the children amused while you finish off those last minute Christmas preparations – take a look at what activities local independent organisations are running as generally they will be VAT-free.
- Get your accounting right to avoid any fines from the tax man. HMRC will as ever penalise mistakes such as a wrongful declaration of output tax so don’t expect leniency.
- When it comes to advertising your charity, take advantage of zero-rated advertising such as “pay per click” internet click through facilities.
The office party VAT rules!
When times are tough and businesses are looking to make savings, events like the office Christmas party are one of the first things to get cancelled. Yet what many businesses don’t realise is that they can claim back the VAT for staff on their Christmas parties, and can backdate a claim by up to 4 years.
The rules on what can and can’t be claimed back on Christmas entertaining and staff gifts are not straightforward. From a VAT perspective, the expenditure on non-employees is viewed as entertainment and cannot be claimed back, so you will need to show the split between employees and their non-employee guests to make a claim. If the entertainment is limited only to the partners or directors of a business then the VAT incurred is not input tax and cannot be recovered. However, if partners or directors attend staff parties along with other employees, the tax is viewed as input tax and is recoverable.
And, should you be splashing out on a Christmas gift for staff, then it’s worth remembering that there will be no VAT on gifts under £50.
The 12 VAT rules of Christmas – Day 6
On the sixth day of Christmas ….
- Looking for the ultimate outfit for the office Christmas party? Remember that all adult clothing carries VAT, so opt for vintage chic and visit your local charity shop, and get a double saving – the clothes will be VAT-free and cheaper.
- Retailers should ensure their POS systems can identify goods bought before the rise so that any later refunds reference the rate that was applied for the original supply.
- During an event, if you are asking for any kind of monetary donation, make sure that it stays VAT free by not offering to provide anything in return for the donation.