Local Authority Newsletter - October 2009
HMRC Brief 33/09
When applying the anti-avoidance legislation in relation to the option to tax, HMRC have relied upon the term “in occupation”. In this Brief they have announced a change of policy as a direct result of the House of Lords decision in the Newnham College case, which concerned whether Newnham was in occupation of the college library. The Court found that Newnham was not in occupation and therefore their option to tax was not disapplied.
HMRC now accept that physical presence alone is not the correct test for the purposes of the anti-avoidance provisions. A person must have actual possession of the land along with a degree of permanence and control (a right to occupy as if they were owner and be able to exclude others from enjoyment of such a right) for there to exist occupation.
HMRC Brief 36/09
This Brief explains HMRC policy on deposits paid and released to the vendor, particularly in the case of land sold to RSLs. The payment of a deposit that is passed to the vendor creates a tax point and this can raise problems particularly in land or property transactions. HMRC’s policy is to look at what is ultimately being supplied. Therefore, if partly completed dwellings are to be transferred at completion, then even though at the time of exchange of contracts and payment of a deposit the site is bare land (which would be exempt), HMRC will accept that the deposit is part payment towards the zero-rated supply of the partly completed dwellings.
HMRC Brief 39/09 (see also VAT Info Sheet 08/09)
HMRC has announced a tightening of the conditions for zero-rating new buildings for relevant charitable use. With effect from 1st July 2009, there is a revised interpretation of the term ‘solely’ when looking at the use to which the new building will be put.
Now, the new building must be used for at least 95% non-business purposes for the first ten years of its life to achieve zero-rated construction for the charity. Therefore, there can only be minimal business use (including letting) and this must be monitored for ten years. If more than 5 % business use occurs in that time, then a ‘change in use’ charge must be paid to HMRC.
There is a transitional period for current projects where construction is commenced before 30th June 2010; these can continue to utilise the previous concession (minimum of 90% non-business use measured at construction with no further monitoring necessary).
We think this change will mean that charity projects will either not now go ahead, or will have to be funded for VAT in addition to build costs.
HMRC Brief 51/09
This Brief and VAT Information Sheet 14/09 provide clarification and correction of previously issued guidance on the circumstances when an Option to Tax can be revoked. Unless the conditions for automatic revocation are met, a taxpayer seeking to revoke 20 years after the time from which the option has effect requires the prior permission of HMRC. Therefore, if you made an option to tax in 1989 (just after the option to tax was introduced) there is now the opportunity to revoke it.
Voluntary Disclosures
As you may well be aware, the VAT system allows taxpayers to make corrections to their VAT returns if an error made on previous returns is below specified limits. These limits are £10,000, or 1% of turnover in Box 6 when less than £5m, with an upper limit of £50,000. Errors over these figures will require a written disclosure to be made, which will attract default interest and potentially penalties under the new penalty regime. Our advice is that if the error is of a value that allows the return to be amended this is nevertheless disclosed to HMRC in order to mitigate the exposure to penalties. However, in the light of content within the new Notice 700/43, the penalty mitigation letter must make it clear that your VAT return has been amended and the letter is not disclosing an error for assessment purposes.
Reversion of the Standard Rate to 17.5%
The VAT rate will revert on 1st January 2010 and therefore you will have to charge VAT at this rate on sales of standard rated goods and services you make on or after this date.
The normal tax point rules will apply in order to decide whether 15% or 17.5% should be charged, although there are optional change of rate rules that you can apply where you provide goods or perform services before 1st January 2010 and raise a VAT invoice and, in some cases, receive payment after the rate change. So, for example, if you raise a VAT invoice after 1st January 2010, for goods you provided, or services that you completed before 1st January 2010, you can, if you wish, apply the 15% rate.
However, there are also anti-forestalling measures which can apply in the following circumstances;
If you are invoicing for a supply spanning the 1st January 2010 then you may have to invoice at the higher VAT rate if the customer is not entitled to recover all of the VAT on the supply; and at least one of the relevant conditions below is met:
- Condition A - the supplier and the customer are connected with each other at any time during the period from the date of the supply to the date of the VAT change.
- Condition B - the value of the supply is more than £100,000.
- Condition C - the supplier or a person connected with him finances a prepayment by the customer.
- Condition D - the supplier raises a VAT invoice where payment is not due until at least six months from the date of the invoice.
Local Authority Specific Issues
HMRC Brief 53/09
HMRC have reviewed their policy in relation to VAT recovery on capital works in relation to voluntary aided schools. A local authority is allowed to contribute funding to a governing body to help it meet the cost of its responsibilities. To date HMRC have accepted that local authorities can recover the VAT incurred on expenditure which is the responsibility of the governing bodies of voluntary aided schools, but which the authority funds.
However, HMRC now realise that this goes beyond what Section 33 actually permits. Section 33 is confined to VAT incurred by local authorities etc on the goods and services that they purchase, not on the goods and services that another legal entity purchases. As the governing bodies of such schools are separate legal entities and are not themselves Section 33 bodies, and they have statutory responsibility for certain capital expenditure, it is the VA school which is purchasing the goods and services, even though these costs may be met from local authority or DCSF funds.
Therefore, with effect from 1 September 2009, with respect to projects initiated after this date, VAT may no longer be recovered by local authorities in these circumstances, as the supplies are not made to them (whether or not paid for from the delegated budget).
HMRC will consider, on their individual facts, cases where a project initiated after 1 September 2009 was funded on the basis of the previous policy.
A local authority may, however, continue to recover VAT on expenditure at a voluntary aided school for which the local authority is statutorily responsible, or where the local authority, rather than the governing body, procures a supply of works and pays for that supply from its own funds. In such cases HMRC accept that the local authority receives the supply in connection with its non business activities.
Fit for the Future Project
Currently this is a pilot scheme, driven by the Department of Health and being run by five local authorities to provide subsidised gym membership to 1000 young people aged 16-22 in each location. The funding/ subsidy will be provided by each Council to the gyms which are providing memberships under the scheme at £5 per month to each young person.
Our view on this funding by the DOH/ Councils is that it represents third party consideration for the gym membership and therefore where the gym is providing a standard rated service (unlike a Sports Trust or NPDO which will be making an exempt supply), VAT will have to be charged to the Council but this would not be recoverable as Section 33 VAT or input tax.
The pilot runs until March 2010. If it is successful and more funding is made available via the DOH, this could cause a VAT issue for more Local Authorities.
Decisions of the VAT Tribunal and UK Courts
Sophie Holdings Ltd
This case considered the limits imposed upon HMRC when raising assessment for under declared VAT totalling £74,836. An assessment for additional tax is only valid if raised within particular time limits (12 months from the date when evidence of facts sufficient in the Commissioners’ opinion to justify making assessment came to their notice and within two years after the end of the accounting period). HMRC missed these limits and therefore the Appellants appeal was allowed.
The moral of this story is that all VAT assessments should be checked to ensure their validity.
Abercych Village Association
The appellant carried out building works on its village hall consisting of the construction of a meeting room, kitchen, toilets and a corridor. The appeal was against the HMRCs’ decision that the works did not qualify for zero-rating. HMRC submitted that the works constituted an extension to, or enlargement of, the hall that was part of the existing building.
The appellant argued that the new structure was an annexe to the hall. This was functionally independent from the existing building and the physical attachment along one wall was not enough to make the works an extension. Moreover, submitted the appellant, the main access to the annexe was not via the hall and the main access to the hall was not via the annexe.
Held, that the internal layout of the new structure and the way in which the kitchen and toilets were able to extend the facilities available to users of the hall were indicative of the structure being an extension. This, together with the external appearance, outweighed the independent function capability. The works were, therefore, excluded from zero-rating by The VAT Act Schedule 8 Group. 5, Note (16)(b).
Had the works not been found to be an extension, they would have satisfied the conditions of Note (17) as they were capable of functioning independently from the existing building and neither was the main access via the existing building nor was the main access to the hall via the new structure.
News from the European Court of Justice
Tellmer Property (C-572/07)
This case has the potential to undermine current UK policy with regards to VAT on communal service charges made by landlords.
The judgement stated that VAT should be charged by the landlord on the service charge rather than treated as a single supply of letting which would ordinarily be VAT exempt, in the circumstances which included the separate invoicing of the cleaning services.
We are awaiting HMRC’s response to the decision, which could affect service charges made by landlords to residential tenants and commercial tenants where no option to tax has been made. It could provide landlords with opportunity to recover VAT on their costs of providing these services, but would be bad news for private tenants and those not registered for VAT or VAT exempt themselves.
If you would like any further information on the above topics
please call:
Steve McIntyre: 01962 737066
Zaenia Rogers : 01962 737062
John Crawford: 01962 737065
Alresford office no: 01962 735350 (Fax: 01962 735352)
E-mail: vat@thevatconsultancy.com
