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Value added tax

Summary of VAT Proposals

The significant VAT announcement in the Budget was the increase in the standard rate from 17.5 per cent to 20 per cent with effect from 4 January 2011, although other, minor changes were also announced. Other VAT provisions are also automatically affected as a result of the rate change. Specific announcements about anti-forestalling provisions and necessary changes to the flat rate scheme have been made now, and further announcements are expected soon affecting, for example, larger businesses required to pay VAT on account, although there will be no changes to the cash and annual accounting schemes. 

On their website, HM Revenue & Customs have published more detailed guidance on the standard rate increase, and associated anti-forestalling measures and anti-avoidance issues.

Change of standard rate

As with any rate change, the increase to 20 per cent will not only affect supplies of goods and services in the UK, but also acquisitions from other EU Member States and imports. Goods and services currently subject to the zero rate, the reduced rate of 5 per cent or which are exempt from VAT, will be unaffected by the change.

The VAT fraction, used in order to calculate the amount of VAT from a VAT-inclusive total, will be 1/6. 

Anti-forestalling legislation

Where there is a VAT rate increase, HM Revenue & Customs see forestalling as taking place when a supplier makes arrangements to issue a tax invoice or receive payment (i.e. the supplier creates an actual tax point) in advance of the basic tax point for a supply of goods or services so that the lower rate applies. The basic tax point is the date on which goods are delivered or made available for the customer to dispose of as owner in the case of goods, and when all work is completed in the case of services. 

The scope of anti-forestalling legislation for the increase to 20 per cent was announced in a separate, written Ministerial statement on 22 June 2010. In effect, it allows for a supplementary charge of 2.5 per cent to apply where HM Revenue & Customs consider forestalling has taken place. Businesses that conduct their activities in the same way they would when no rate increase is expected, will not be affected by this legislation.

The new legislation will take effect on or after 22 June 2010 and apply where supplies of goods and services, including rights and options, are made at the standard rate and the customer cannot recover all of the input tax on the supply, and one or more of the following conditions are met:

  • the supplier and customer are connected
  • the value of the supply, including any associated supplies under the same arrangement, exceeds £100,000, unless issuing advance invoices in such arrangements is normal commercial practice
  • the supplier or another person connected to the supplier funds a prepayment, or
  • an advance tax invoice is issued, where payment in full is not due within 6 months (NB this would not apply to hire purchase invoices issued in the usual way).

The supplementary 2.5 per cent charge will become due on 4 January 2011 and must be accounted for on the VAT return covering that date. For rights and options, the charge is triggered on the date they are exercised on or after 4 January 2011.

The charge will not apply to advance rental charges in respect of land, buildings or other assets if they are for a period of one year or less and such charges are normal commercial practice.

Changes to the flat rate scheme

The standard rate increase to 20 per cent on 4 January 2011 will be accompanied by appropriate increases to the rates applicable to business types under the flat rate scheme. 

The turnover threshold of £150,000 below which businesses may choose to join the flat rate scheme has not changed as a result of the standard rate increase, but the exit threshold will increase from £225,000 to £230,000 from 4 January 2011. So from that date, businesses using the scheme must leave it once their tax-inclusive flat rate turnover exceeds £230,000 or they expect that turnover to exceed £230,000 in the next 30 days.

Currently, if a business exceeds the exit threshold because of a one-off transaction, but does not expect its annual tax-inclusive flat rate turnover to exceed £187,500, it may continue to use the scheme. The standard rate increase will see an uplift in this threshold to £191,500.

HM Revenue & Customs will apply a sympathetic approach as regards their power to allow a retrospective leaving date from the scheme if businesses consider it no longer helps them as a result of these changes.

Implementation of EU cost-sharing exemption

HM Revenue & Customs will consult with affected parties concerning options for implementing the EU cost-sharing exemption. This will mainly affect charities and similar sectors.

The right to deduct and 'Lennartz' accounting

A new measure will ensure that from 1 January 2011, input tax recovery will only be allowed on the purchase of immoveable property, boats and aircraft to the extent the assets are used or to be used for business purposes. It will also ensure that revenue is protected as regards application of ‘Lennartz’ accounting, which allows full recovery on the purchase at the outset and a payment of output tax in any period in which the asset is used for private purposes. Recent case law has shown that, in the past, HM Revenue & Customs have allowed too broad an application of the principle.

Postal services and passenger transport

A new measure will ensure the exemption for postal services will only apply to the ‘universal service provider’ (‘USP’) as required under EU law, or to private providers of relevant postal services, when authorised to do so by the USP pursuant to a licence duty. In the UK, the USP is the Royal Mail (including Parcelforce) but only when it is acting in the capacity of the USP. In other words, some of its services will cease to be exempt. 

Furthermore, the zero rate provisions for passenger transport will be updated to reflect the status of the transport provider in conjunction with its postal services. That means, the Royal Mail, as the sole USP in the UK, will be able to provide zero-rated passenger transport services when it is acting as the USP. These changes will have effect from 31 January 2011.

Aircraft

From 1 January 2011, certain criteria for an aircraft to qualify for zero-rating will change.

Place of supply of gas, heat, electricity and cooling

This measure will implement the EU changes to the place of supply of natural gas and electricity from 1 January 2011. The existing rules in the UK will be amended to:

  • cover supplies relating to all types of natural gas pipeline so long as they are located within the EU, unless they are outside the EU but linked to pipelines within the EU
  • extend relief from VAT on the import of all natural gas imported via a network (including liquefied natural gas in a tanker)
  • extend the scope of the relief to include heat and cooling supplied through networks