Issue 15

In this issue:

Local Authority Issues

• Moratorium on 5% calculations
• Weights Measures
• Invoicing requirements

Updates on HMRC Policy

• Revenue & Customs Brief 64/07
• Revenue & Customs Brief 67/07
• Revenue & Customs Brief 74/07
• Advisory Fuel Rates
• New Penalty Regime

Recent VAT Cases

• VAT reclaims and the 3 year capping rule
• Teleos
• A Polish(ed) VAT scheme

Local Authority Issues:

a) Moratorium on 5% calculations
Our update must start with the subject of the moratorium on the 5% deminimis calculations announced by HMRC recently.  It has been widely publicised by CIPFA and is a welcome development in the management of exempt input tax for Local Authorities. 

There are so many Authorities which have either forecast to exceed their deminimis or are so close to it that they have had to defer capital projects, that the news that they do not have to carry out the calculation for the year 2007/08 must have come as a welcome relief.  HMRC have accepted that Authorities will not breach the 5% limit during that year. 

An announcement at this stage in the year does not allow much time for spending plans to be changed if projects were put on hold and we do not know what the position will be for 2008/09, so steps will need to be taken to ensure that VAT management remains a priority.  But we all hope that the review of this whole area, especially for smaller authorities, will recommend some actions to provide clarity and certainty.  We await further news. 

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b) Weights Measures

Prior to 1992, only local authorities could undertake the testing and approval of non-automatic weighing machines, thus charges made by the authorities were treated as non-business.  However, 1992 saw the introduction of Regulations which removed the longstanding monopoly and allowed other approved bodies to enter the testing field on new machines.  The charges therefore in respect of the new machines became standard rated for VAT.
In October 2007, HMRC clarified the position in respect of how VAT should be applied by local weights and measures authorities (LWMA) for services in relation to weighing and measuring from 1 April 2008.
The three cores pieces of legislation (Measuring Instruments Directive ‘MID’, Non-Automatic Weighing Instruments ‘NAWI’ and Measuring Instruments Regulations 1988 ‘MIR’) have slightly conflicting approval levels (i.e. some allow other approved bodies and some only the LWMA) and therefore the circumstances as to when VAT should be charged required expanding.
Under MIR, and also for re-verification of equipment after adjustment, the statutes do not permit work to be carried out by anybody other than LMWA.  Therefore the fees raised in these circumstances are outside the scope of VAT.
However, the ‘notified bodies’ role is one for the LWMA and approved bodies alike, therefore any LWMA which acts as an ‘approved body’ in these circumstances under MID and/or NAWI should account for VT on the charges raised, in line with independent business operators.  These same principles apply to fees for verification, and re-verification after repairs, where the market is open for other approved bodies as well as the LWMA.
HMRC expect the above treatment to be correctly applied to all billing systems from 1 April 2008 onwards.

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c) Invoicing Requirements

From 1 August 2007 it is necessary to apply sequential numbering to all invoices.  Many Local Authorities use check digits, these end numbers would mean the numbering is not sequential, however HMRC have advised that, as invoice numbers are still issued sequentially but for the check digit, they will accept that the requirement is met.  This was confirmed in the CIPFA VAT Committee meeting back in June 2007.

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Updates on HMRC Policy :

a) Revenue & Customs Brief 64/07

HMRC have revised their policy on the liability of serviced building plots (bare land in respect of which civil engineering works have been carried out to provide gas, electricity, water, mains drainage street lighting and sewerage).  With immediate effect, the supply of a serviced building plot is a single exempt supply of land by the landowner.

The change has arisen from the recent Tribunal decision in Douglas Virtue & Sonia Virtue T/A Lammermuir Game Services where the Tribunal held that the sale of a ‘plot of land within a serviced site’ (The Tribunal’s description in preference to the term serviced plot) constituted a single exempt supply of land, rather than the multiple supply of both exempt land and standard rated civil engineering works.

Following this change, landowners will now be making an exempt supply of land and thus will be unable to register for VAT if this is their only business, or reclaim any input VAT they have incurred, e.g. on standard rated civil engineering works.  However, Customs do accept that such works carried out on plots which are to be used for new dwellings or relevant residential or relevant charitable purpose buildings, can be zero-rated (see the Brief for details of conditions that Customs required to be fulfilled in these cases).  Of course, in other cases, the exempt supply can be made into a standard rated supply by the use of the option to tax, thereby safeguarding recovery of VAT on costs.

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b) Revenue & Customs Brief 66/07

This Brief has been written to merely clarify HMRC’s policy on the construction, and first grant of a major interest of, ‘independent living’ units built within the curtilage or grounds of residential care homes. 

In order for the services of the construction, or the first major grant, of such units to qualify for the zero-rating, they must fulfil the criteria for buildings ‘designed as dwellings’ or indeed buildings ‘intended for use solely for a relevant residential purpose’.

Although HMRC accept that the ‘independent living’ units will usually display most of the characteristics of a ‘dwelling’ for VAT purposes, usually they have a stipulation in their planning permission which prevents separate ‘use’ from the existing care home or separate ‘disposal’ and therefore they fall foul of the full list of criteria stipulated in Schedule 8, Group 5, note 2 of the VAT Act 1994.

The Brief also goes on to say that HMRC do not accept that the building/s qualify as ‘relevant residential’, because note 4 to the same Group states that personal care must be provided by an institution and that 90% of the residents must use the institution as the sole or main residence.  The individual units are not viewed as an institution and therefore cannot fulfil these criteria.

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c) Revenue & Customs Brief 74/07

With effect from 1 January 2008, renovations and alterations to residential properties that have been empty for at least 2 years will be eligible for a reduced VAT rate of 5% on any services and goods provided alongside those services in undertaking the works.

Previously, the property had to stand empty for 3 years prior to commencement of the works for the works to qualify for the reduced rate.

For contractors already working on a property, where this property has remained unoccupied for 2 years as at the 1 January 2008, any invoices after this date will qualify for the reduced rate.

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d) Advisory Fuel Rates

Click on the link for the latest fuel advisory rates.

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e) New Penalty Regime

Readers may be aware that there is to be a new penalty regime to be introduced in early 2009.  The regime aims to create just one regime applicable to all taxes, including VAT. 
The main impact for VAT is that even voluntary disclosures may be subject to penalties in the future, all depending on the ‘behaviour’ the tax payer is deemed to have displayed. 
There are 4 different types of behaviour:

1. a mistake made despite the person taking reasonable care
2. careless
3. deliberate but not concealed
4. deliberate and concealed

HMRC have confirmed that they will not be looking to penalise any taxpayer who can show that they have taken "reasonable care". They have even discussed the notion of suspended sentances for "good behaviour" !

Examples of the proposed penalties are:

• an inaccurate document is given carelessly - maximum penalty payable is 30% of Potential Loss of Revenue (PLR)
• an inaccurate document is given deliberately but no concealed - maximum penalty payable is 70% of PLR
• an inaccurate document is given deliberately and concealed - maximum penalty payable is 100% of PLR

Mitigation will be possible, for example, up to 100% for a careless inaccuracy where ‘good    behaviour’ is subsequently displayed.
The worrying factor in the new proposals is that HMRC will of course decide whether you have been ‘careless’ and therefore whether a penalty is due.  Not surprisingly there are no published definitions for these ‘behaviours’ yet.  It appears that these may end up being determined by those brave enough (and rich enough) to take test cases through the Tribunals.  

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Recent VAT Cases:

From the House of Lords:

The House of Lords have ruled on the cases of Fleming & Conde Nast, a long running dispute regarding VAT reclaims and the 3 year capping provisions introduced in 1997.

The decision confirms that the Government's introduction of a 3 year time limit on filing claims for under-recovered input tax was defective as it contained no transitional period and must be disapplied to claims for input tax incurred before 1 May 1997.

They also rejected HMRC's argument that taxpayers must show that they would have made a claim had there been a transitional period.

Until such time as the Government or HMRC announce the introduction of a prospective and adequate transitional period it appears that the current time limit is  incorrect. This means that all claims for input tax which arose before the defective change in legislation (1 May 1997) will be valid subject, of course, to the normal recovery rules. HMRC will no doubt respond shortly.

The decision represents an opportunity for you to revisit any claims made and refused and/or any claim not made. It applies to input tax incurred before 1 May 1997 and potentially for output tax that you may have over-declared before December 1996.

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From the European Court of Justice:

Teleos
The ECJ gave its judgement in the Teleos case in September 2007, which states that goods must physically leave the territory of the Member State of the supply to qualify for zero-rating.
However, if a supplier acts in good faith and submits evidence establishing a right to zero-rate an intra Community transaction, and has no involvement in tax evasion and takes every reasonable measure in their power to ensure that the transaction did not lead to their participation in taxable evasion, then the Member State cannot hold the supplier to account for the VAT on those goods if the information relied on subsequently proves to be false.
HMRC expect few cases to be on all fours with Teleos but they do state that anyone who considers that an assessment for zero-rating falls on the basis of the Teleos decision in the ECJ, then they should make a claim subject to the time limits for such claims. 

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A Polish(ed) VAT Scheme?
In another ECJ case the Advocate General has issued an opinion relating to Netto Supermarkets in Germany and the production by Polish shoppers in Germany of discarded till rolls that they had collected from the car parks, shopping trolleys and waste bins. The shoppers submitted these discarded documents for a VAT refund accompanied by forged forms and forged Customs’ stamps.  Between 1992 and 1998 Netto refunded considerable sums of VAT on the basis of the documentation provided.  However they later discovered the fraudulent conduct and reported the fact to the local Inspector who, after investigation, demanded payment of the refunded VAT.  The Advocate General considered the question of whether Netto had acted with due commercial care and in good faith before discovering the fraud. He concluded that the refund of VAT by Member States cannot be precluded on the grounds of fairness if conditions are not satisfied if the taxable person was unable, even by exercising due commercial care, to recognise that these conditions were not met.

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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