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Change in VAT treatment for certain supplies made by employers under salary sacrifice arrangements
Following a ruling by the European Court of Justice (ECJ) that the provision of retail vouchers to employees under a salary sacrifice arrangement amounts to a supply for consideration, HM Revenue & Customs (HMRC) have announced that all benefits provided under such arrangements shall be subject to output tax.
It has long been the case that benefits provided to employees in return for a deduction from their salary have been subject to output VAT, with the input VAT recoverable under the normal rules. However, benefits provided as part of a salary sacrifice arrangement have previously been considered by HMRC as being outside the scope so that output VAT was not due, although input VAT was recoverable.
Now, following the ECJ’s judgment in the case of AstraZeneca, HMRC have issued new guidance relating to all benefits supplied under a salary sacrifice arrangement where the supply is subject to VAT.
- From 1 January 2012, output VAT must be accounted for on standard-rated goods or services supplied under a salary sacrifice arrangement.
- The value to be used to determine the output VAT due is the greater of the consideration paid by the employee (either through deduction or salary sacrifice) or the cost to the employer.
- Input VAT is recoverable subject to the normal rules.
- There is no impact from these new guidelines on:
- childcare vouchers (note, however, that associated administrative fees relate to exempt supplies so that input VAT is not recoverable in principle unless total exempt input VAT is within the annual partial exemption de minimis limits (£7,500 p.a.);
- benefits provided for no consideration from the employee;
- employee meals (except those provided under a salary sacrifice arrangement); or
- motor cars where input tax is normally blocked.
The full brief can be read at the following link: Revenue & Customs Brief 28/11
Further changes to the Place of Supply of Services rules from January 2011
With effect from 1 January 2011, entertainment and training services provided to business customers will follow the general rule for the place of supply of services which has been in effect from January 2010 – that is, they are to be treated as being supplied where the customer is established (see Notice 741A for full details). The exception to this is if the service supplied is of admission to an event (including conferences and seminars) or an ancilliary service related to admission, where the service will be deemed to take place where performed (so that if performance is in the UK, UK VAT will be due).
For further details, the full brief can be read at the following link: Revenue and Customs Brief 52/10, which also provides guidance on the increase in the standard rate of VAT to 20% from 4 January 2011.
Change in the tax treatment of business entertainment of overseas customers
Following a ruling by the European Court of Justice, HM Revenue & Customs (HMRC) have announced that the block on the recovery of input tax on the business entertainment of overseas clients will be lifted.
Making claims in respect of the entertainment of overseas business customers
- Claims for previously restricted VAT can now be made in respect of input tax subject to the usual four year cap. Despite previous correspondence indicating the contrary, HMRC will not accept claims prior to this period.
- VAT incurred in future tax periods can be recovered in the usual way.
- HMRC expects that, as a minimum, claims are supported by the following evidence:
- details of the overseas customers
- the type of expenditure, for example, meals to support business meetings, etc.
- the amount of VAT claimed
- evidence that VAT has been incurred and not previously been deducted
- if required for historical claims, evidence of the type of business entertainment the business normally excludes from recovery by reference to recently rendered tax periods.
Consideration of Private Use Charge
In some circumstances an output tax charge to reflect private use arises and cancels out any deductible input tax. A private use charge will apply unless the following tests are met:
- The necessity test i.e. whether it is necessary for the taxable person to provide goods or services that are enjoyed privately in order for him to make his taxable supplies
- The business purpose test e.g. the facilitation of a meeting
If you conclude that the entertainment you provide should trigger a private use charge, HMRC suggests that you treat the VAT incurred as non-deductible, rather than claiming a deduction and offsetting this with an output tax charge.
For further details, including scenarios to assist in deciding the correct VAT treatment, the full brief can be read at the following link: Revenue & Customs Brief 44/10.
Action on change of VAT rate
The Chancellor, as anticipated, announced to-day, 24 November 2008,
a reduction in the standard rate of VAT to 15% as part of the measures
to be taken to combat the economic recession. The reduced rate will
apply from 1 December 2008 (and through to 31 December 2009, although
that might change). Section 2, VAT Act 1994 allows a Treasury order
to be made varying the standard rate by up to 25% - that is, by
up to 4.375% at present. However, European rules require that the
standard rate should not be lower than 15%.
With a VAT rate of 15%, the VAT fraction is 3/23rds.
At times when the VAT rate is increased, it may be necessary to
refer to contracts to ensure that the increased rate can be charged.
It is unlikely that any customer will object to a lower rate being
charged.
VAT is chargeable at the rate in force at the time of supply (the
date goods are delivered/made available to the customer or services
are completed) unless that basic tax point is superseded by an earlier
payment or issue of an invoice within 14 days of the basic tax point
(the 14 day period may be extended with HM Revenue & Customs'
(HMRC) agreement).
For supplies whose time of supply is on or after the date of the
rate change, the new rate must be applied.
However, special provisions apply at the time of any change in
the rate of VAT. HMRC's detailed guidance in Notice
700, the VAT Guide, can be seen here.
In brief, the supplier can choose which rate to apply, either for
all supplies or individual supplies. For most businesses, the special
provisions can be summarised as follows (these provisions do not
however apply to self-billing arrangements):
| Sales options |
Either |
Or |
And/Or |
| Goods (assumes practice is to invoice within 14 days of delivery) |
|
|
|
| Goods delivered before change of rate, but not invoiced |
Charge VAT at rate in force on date of delivery |
Charge VAT at new rate in force on invoice date |
|
| Goods invoiced or paid before change of rate, but not delivered |
Allow rate charged on invoice to stand |
Credit original invoice and re-invoice at new rate* |
|
| Services (assumes practice is to invoice within 14 days of
delivery) |
|
|
|
| Services completed before change of rate, but not invoiced |
Charge VAT at rate in force on date of completion |
Charge VAT at new rate in force on invoice date |
|
| Services invoiced or paid before change of rate, but not delivered |
Allow rate charged on invoice to stand |
Credit original invoice and re-invoice at new rate* |
|
| Services part-completed before change of rate, but not invoiced |
Charge VAT on whole consideration at rate in force on date
of completion |
To the extent that services were complete before rate change,
charge VAT at rate in force on part-completion |
To the extent that the services are completed after the rate
change, charge the balance of consideration at the new rate |
| Continuous supplies of services |
Charge VAT at rate in force on date of invoice |
To the extent that services were carried out before the rate
change and can be quantified, charge VAT at the rate in force
before the change |
|
| Purchases |
Ensure that you |
And |
|
| Goods or services |
Recover VAT at rate charged by supplier |
Ensure correct VAT fraction is used |
|
* Credit notes used simply to allow re-invoicing at the changed
rate must be issued within 14 days of the rate change. Note however
that where a credit note is issued to correct an error or otherwise
in the course of ordinary business, the credit note must show the
VAT rate in force at the time of the original invoice.
New Option to tax (OTT) rules from 1 June 2008
The law relating to the OTT has been rewritten with effect from
1 June 2008. The revisions include the guidance on revoking an option
to tax.
The detailed legislation can be seen
here.
HM Revenue & Customs' (HMRC) comments can be seen in Brief
24/08 and Information
Sheet 3/08.
Detailed guidance on HMRC's views can be seen in the revised Notice
742A, Opting to tax land and buildings, announced by Brief
28/08.
Was the rewrite necessary? Yes. Does it simplify what was a difficult
area of VAT law? Decidedly not.
Do I need to do anything now in respect of OTT already made?
No. Whilst the revised law allows certain things to happen in respect
of past OTTs, it is not necessary to revisit them at this stage.
Do I need to do anything from 1 June 2008?
In the vast majority of cases, if you make an option to tax on or
after 1 June 2008, there will be no practical difference between
the old system and the new. However, we recommend that advice is
taken on the specific circumstances.
Here is a very brief summary of the main changes:
Revised forms and certificates
Fuller details of the forms required from 1 June 2008 can be found
in Notice
742A. A specimen of the option to tax notice, Form
VAT1614a, can be found here.
Certificates will be required from Housing Associations and certain
intermediaries who wish an option to tax to be disapplied in respect
of certain transactions.
Real estate options
In the past, a rather informal procedure applied whereby, in the
terminology used by HMRC, a person opted to tax the UK: this was
known as a global option. From 1 June 2008, a real estate election
effectively does the same thing, but it is not constrained by law
rather than practice. The crucial aspect is that a person can opt
out of the "global" election if the proper notification is sent
at the correct time. Advice should be taken before such an election
is made.
In addition, the revised law addresses the position of how such
an election will affect a company joining or leaving a VAT group.
Revoking an option to tax
The revised law covers the procedures governing revocation of an
option to tax, including
• revocation during a "cooling off" period immediately after an
option is made;
• a new provision whereby an option will be revoked automatically
after six years in the event that the person making the option has
not in fact acquired an interest in the opted land within that period;
and
• revocation 20 years or more after the initial option was made
(which will have practical effect from 1 October 2009).
Budget 2008 changes
HMRC noted the following changes to the mechanics of VAT:
Correction of errors: Budget Notice 75
From 1 July 2008, the de minimis level below which VAT errors must
be reported separately to HMRC will go up from £2,000 to at
least £10,000. An upper limit of £50,000 will apply
to certain businesses – see
the Budget Notice 75.
Fuel scale charges
The customary annual increase in fuel scale charges was announced
in Budget Notice 76.
Retrospective claims
If you believe that you have either paid more VAT or claimed less
VAT than you should have in the period from 1 April 1973 to 1 May
1997, you will have to submit your claim for a refund no later than
31 March 2009 – Budget Notice
78.
We wish you luck with finding the supporting documentation.
Changes to the option to tax regime
Budget Notice 79 trails
legislative changes which are to be made with effect from 1 August
2008 with the intention of simplifying the procedures relating to
opting to tax interests in land. No cynical sniggering, please.
The Budget Notice flags changes in the following areas "to improve
practical administration of the option to tax and its revocation
…":
• Opted properties held in a VAT group;
• Opted buildings acquired for use as dwellings or relevant
residential purpose and bare land acquired for construction of
building for such purposes;
• The introduction of a new option to simplify the option to
tax
process for taxpayers with a number of properties;
• Early revocation of an option to tax within a "cooling-off"
period.
End of "Staff hire concession"
The staff hire concession, which allows employment businesses to
charge VAT only on their profit margin from the supply of temporary
workers, to the benefit of many organisations which are unable to
recover VAT in full – banks, building societies, hospitals, universities
etc – is to be withdrawn with effect from 1 April 2009. Employment
businesses will then have to add VAT to the full cost of the supply,
including the wages element, which will therefore increase the overall
cost to those businesses unable to recover all of the VAT charged.
The only surprise is perhaps that it has lasted as long as it did
– the concession as it currently stands was introduced in 1997 and
was expected to be withdrawn some time in 1998.
• The automatic lapse of an option to tax six years after the
taxpayer ceased to have any interest in property that they had
previously opted to tax;
• The ability, in certain circumstances, to exclude a new building
from a previous option to tax; and
• Late applications for permission to opt to tax.
PBR 2006
Partial exemption
Following consultation in 2006, the regulations relating to VAT
partial exemption methods will be amended from 1 April 2007. Details
of the changes can be found here.
MITC fraud
As the result of very legitimate concern over the £billions
of VAT being avoided as a result of Missing Trader Intra-Community
fraud, HMRC is seeking EC approval for a change which will put the
obligation on the purchaser to account for VAT on certain hi-tech
products. Details of the current position can be seen here.
Transfer of going concern
The assets of a business can be transferred free of VAT if the conditions
set out in Article 5, VAT (Special Provisions) Order 1995 are met.
However, s 49, VAT Act 1994 requires that the VAT accounting records
should be transferred too unless HMRC is requested to direct otherwise.
From Royal Assent to the Finance Act 2007, it is intended that the
seller will ordinarily retain the VAT records. The revised law will
also set out the information which the seller must pass to the buyer.
EU expansion
Bulgaria and Romania became members of the European Union from 1
January 2007. The requirements for intra-Community trade set out
in Notice 725 therefore
apply to movement of goods to and from these countries.
Intrastat thresholds
The thresholds referred to in Notice
725 requiring statistical returns for Arrivals and Dispatches
have been increased from £225,000 to £260,000 with effect
from 1 January 2007.
European VAT law
UK VAT legislation is based on European directives. The main European
VAT legislation, previously set out in the 1st, 2nd and 6th EC VAT
Directives, has been consolidated into the recast 6th VAT Directive.
The Recast Directive was published in the Official Journal of the
European Union on 11 December 2006. Its official reference is Directive
2006/112/EC of 28 November 2006.
The intention is that nothing should have been changed by the consolidation
exercise.
Authorised economic operator (AEO)
Businesses with significant intra-EU trade are to be invited to
apply for AEO status, with the intention that authorised businesses
will see a reduction in time and compliance costs. A more cynical
view has been expressed that, rather than a reduction in time and
compliance costs for authorised companies, there will simply be
an increase in time and compliance costs for those who remain unauthorised.
AEO status will be effective from 1 January 2008.
Full details of the application process are still awaited. Details
of the scheme can be seen here.
HMRC expect to be in a position to accept applications from 1 July
2007.
Pre-Budget Report
Business Brief 23/05 provides details of planned VAT changes announced by the Chancellor in his Pre-Budget Report on 5 December 2005. Not surprisingly, there is nothing at all on recent speculation that the standard rate will be increased to 20%.
Most of the announcements relate to VAT and land, including significant changes planned for the option to tax legislation, although the Business Brief also contains welcome news for the insurance industry, which had been expecting to pay VAT on outsourced services. HMRC has announced that UK law on the exemption applicable to insurance business will not be amended to reflect the ECJ's ruling in the case of Arthur Andersen & Co Accountants until such time as a planned European Commission review of this area has been completed.
Click here for more info >>>
Pre-budget Report
The main features announced in Business Brief 23/05 are:
- Consultation on a re-write of the very detailed legislation on VAT and property contained in Schedule 10, VAT Act 1994. The re-write is to be welcomed as successive legislative changes to combat avoidance techniques has made the existing version quite cumbersome. The potential sting in the tail is the note that “…the opportunity is being taken to make some minor amendments to the existing rules aimed at improving practical administration of the tax.” We await clarification of that statement with interest – it usually means that HMRC is unhappy with something (see next bullet point for example).
- Consultation on a specific part of Schedule 10, VAT Act 1994 relating to the correct VAT treatment when the legal and beneficial ownership of land are separated. HMRC are unhappy with a recent Tribunal ruling (in the case of Abbey National) and want to change the law to reflect their views more closely. However, “the Government has decided to consult business to see who uses the [existing] provision and why, with a view to ensuring that any changes do not inadvertently interfere with normal business practice.”
- The results of earlier consultation on the future of the option to tax, including the ability to revoke options which will arrive from 1 August 2009, 20 years after the facility was introduced. Anyone who has previously exercised an option to tax should review the Business Brief in detail – available here >>>
The proposals include:
- Written revocation by one of two routes – Automatic Permission or Permission Consent;
- The conditions applicable to each form of consent, which will include certificates being given that no steps have been taken which will give rise to unacceptable revenue losses if permission is given;
- An effective date for the revocation of the date of posting (which will no doubt give rise to Tribunal cases where the precise date is critical);
- Procedures which will apply in the event of incorrect certificates being made (which include the cancellation of the revocation, the treatment of all monies received after the revocation date as including VAT, which will be payable to HMRC together with interest, and in certain cases a penalty. The nature of the penalty has still to be decided) ;
- The facility to “re-opt” from a future date after a revocation has been made. This will be treated as a new option, with its own 20 year cycle starting from the date it is made before it can be “re-revoked”;
- Confirmation that tenants of opted property will not have to be consulted by the owner before an option is revoked;
- Considerable discussion of an early facility which has caused problems – the “Global Option” – used by many businesses in August 1989 to notify options to tax on all property held or to be held. Interestingly, although the facility will be withdrawn, it is to be replaced by a “Universal Option” offering more or less the same ease of use, but with more formal procedures to be followed;
- Revised rules for options to tax and revocations when companies join or leave VAT groups;
- Clarification of the treatment of options to tax where a building is demolished or where land is opted and then a building is constructed on the site (recognising at last the position that in law an option to tax exercised on land covers any building subsequently constructed on it), although this treatment will not be applied retrospectively.
Caveat: this summary is no substitute for a detailed reading of the relevant legislation as and when it becomes available.
Section 17, Finance Act 2006 enables HMRC to introduce a revised
Schedule 10, VAT Act by Treasury Order. No order has yet been
laid
Ten new Member states join the EU from 1 May 2004.
Your VAT and duty accounting procedures may change in consequence.
Click here for more information, including links to official sources
and a list of action points required in respect of intra-EU trade.
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Money Laundering Regulations 2003
By advising clients on matters relating to value added tax, the company is bound by the terms of the Money Laundering Regulations 2003, which came into force on 1 March 2004.
HM Customs & Excise also took the opportunity of closing off
some loopholes – again most businesses will be unaffected. However,
anyone disposing of a commercial property as part of the transfer
of a going concern on or after 18 March 2004, or anyone considering
VAT-grouping a joint venture company on or after 1 August 2004,
should take advice to ensure that planned changes do not catch them
inadvertently.
Budget 2004
The VAT changes announced following the Chancellor's Budget
speech on 17th March 2004 will have little practical effect for
most businesses. There were the usual updates to registration thresholds,
cash accounting and annual accounting limits and fuel scale charges.Details
of these can be found by clicking on this link: www.hmce.gov.uk/forms/budgetnotices/bud-2004.htm.
