VAT: Land and Property Changes

There is a proposal to remove the exemption and zero rating from certain transactions relating to land and building from the 1^st October 2012.

The changes affect:

1.        The exemption currently applying to self storage

2.        The exemption applying to the rental of chairs by hairdressing salons.

3.        The zero rate applying to the sales of caravans for holiday use

4.        Approved alterations to residential or charitable buildings

All of the above supplies will become standard rated. In addition, the first grant of a major interest in the substantial reconstruction of buildings at item 4 above will be exempt where the building is not reduced to a shell.

Footnote: The imposition of the standard rate to self storage is confusing to say the least especially since the definition is not clear and the exemption will still apply to such transactions between connected businesses. Hopefully the government will clarify these issues before the 1^st October 2012 deadline.

Exemptions for chair rental within hairdressing salons have been the subject of litigation for many years and this proposed measure will certainly put the issue to rest.

The change being proposed to caravans seeks to restrict the application of the zero rate to residential caravans as originally intended.

Currently, approved alterations to qualifying listed buildings are zero rated whilst repairs and maintenance are standard rated. Further, zero rating currently applies to the first grant of a major interest in a listed building where at least 60% of the works qualify as approved alterations. Such a grant will now become exempt so that input tax incurred in construction can not be recovered. There is however a transitional period for contracts that were signed prior to budget day 21^st March 2012, (or the case of substantial reconstructions where 10% of the works have been completed by 21^st March 2012), where the zero rate will still apply and VAT incurred therefore recoverable. This period expires 20^th March 2013.

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VAT: Food & Drink Changes

The zero rating for food is to be re-aligned to remove inconsistencies and perceived anomalies. The areas of focus are: hot take-away; food consumed on shared premises; and nutrition beverages.

The proposal seeks to ensure that all food that is above the ambient temperature when provided to the customer is standard rated with the exception of freshly baked bread.

Additionally the thin line between “on premises” and “off premises” will be removed. As a result, food supplied in all areas set aside for the purpose, including premises shared with other retailers, will be treated as supplied in the course of catering and standard rated. As a consequence food consumed in food courts in shopping centres and at table and chairs on pavements will be standard rated.

Sports drinks are usually zero rated because of their nutritional content. This proposal is intended to standard rate all sport drinks regardless of their nutritional content.

Footnote:  Under EU law, once the tax base is broadened in this respect there can be no reversal. The draft legislation is the subject of consultation with a 4^th May 2012 deadline for responses. It remains to be seen whether these measures create simplification or more confusion. Example, how do you define “freshly baked bread”? 

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VAT: Fuel Scale Charges

The fuel scale charge for private use of business fuel will increase in line with fuel prices for VAT accounting periods ending on or after 1^st May 2012. Subject to consultation, an extra statutory concession (ESC) allowing businesses to avoid the scale charge will be brought into UK law. 

UK law currently requires a scale charge to be paid when business fuel is used for private use. The ESC will allow companies who do not claim VAT on the petrol not to pay the scale charge. 

 

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VAT: Changes to the Registration & Deregistration Thresholds

The registration threshold for VAT is now £77,000 from the 1^st April 2012 with the corresponding de-registration threshold set at £75,000.

From 1^st December 2012, the threshold for overseas businesses trading in the UK will be removed, (i.e. a nil registration threshold will apply), bringing the UK in line with other European jurisdictions.

Also, by 31^st October 2012 HMRC will introduce an online VAT facility where businesses will be able to register, deregister and amend their company details.

Footnote: the £4,000 increase in the VAT threshold is the largest in recent years and will increase the number of businesses that will escape the VAT net. 

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Photo Books are Books

HMRC’s Decision regarding Photo Books
The First Tier Tribunal has ruled in favour of the tax payer in the Harrier LLC case. As a result HMRC has issued Revenue & Customs brief 04/12 accepting that Photo books are books and should therefore be a zero rated supply. HMRC has decided not to appeal the decision.

Background
Harrier provided customers with a photo book that comprised a number of photographs taken by the customer. Typically, the customer uploads his or her photographs and other images of text, drawings, handwritten text and so on to a third party website. The customer chooses the particular photo book template they desire and can arrange the layout of individual pages.

Once the customer has completed their action they can then place their order. The order is electronically transmitted to Harrier who then produces the photo book using printing presses.

Harrier claimed that the photo books were zero-rated for VAT purposes as they fell within the definition of book under the law.

HMRC’s Argument
HMRC’s contention is that what Harrier supplies is a service and not goods. They further argued that the photo books are only ancillary to that service and the entire supply should therefore be standard rated.

The Decision
The Tribunal decided that the majority of the items in question were books and dismissed HMRC’s argument that the photo books were ancillary to a supply of services.

In making its decision the Tribunal took support from the High Court case of Colour Offset Ltd [1995], where it was found that a book has the minimum characteristics of having a significant number of leaves, usually of paper, held together by front and back covers usually more substantial than the leaves. The book must also be designed to be read or looked at.

Two items were found not to be books because they consisted of spiral binding and the pages had the quality and appearance of individual photographic prints.

HMRC’s Policy Going Forward
Subject to certain exceptions, HMRC accepts that a photo book which possesses, as a minimum, several pages, a cover stiffer than its pages and is bound, will qualify for zero-rating as a book. The book must also be designed to be read or looked at.

The Effect of the Decision
If you consider that the supplies that you make are similar to those of Harrier and the ‘books’ that you supply have the characteristics described above then your supply is likely to be of a book and therefore zero-rated.

If they do not then it is likely that they will be taxable at the standard rate.

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SA Donate will close in April 2012

SA Donate is the scheme for Self Assessment taxpayers to direct HM Revenue & Customs to pay any Self Assessment tax refund to a charity of the taxpayer’s choice. They can also claim Gift Aid on the donation where appropriate.

The scheme, introduced in 2005, has not been used very much, and would need an extensive upgrade to safeguard it from fraud. As a result, at Budget 2011, the Government announced its intention to withdraw the scheme from April 2012.

This means that donors will no longer be able to send a tax refund to a charity straight from their tax return from April 2012. This option will be removed for forms for tax years 2011-12 onwards and while it will still appear on forms for earlier years these repayments will be sent to the taxpayer and not to the nominated charity.

Donors can still donate their tax refund to any charity themselves and claim Gift Aid if the qualifying conditions have been met.

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EC to slash accounting red tape for micro-businesses

The European Council has approved new requirements that will slash red tape and create a less onerous accounting and financial reporting regime for micro-enterprises.

The new rules should dramatically cut administrative bureaucracy for companies that do not exceed the limits of two of the following criteria: a balance sheet total of €350,000 (£293,000), a net turnover of €700,000 and an average of 10 employees during the financial year.

The directive allows EU member states to exempt micro-enterprises from the publication of annual accounts.

Dr Nigel Sleigh-Johnson, ICAEW's financial reporting faculty chief, said the decision — a conclusion to the three-year project, was a long-awaited step towards establishing a more appropriate accounting regime for small companies.

'Micro-businesses represent a substantial proportion of the UK economy, and is a key source of start-up activity and innovation, vital to the UK's economic recovery. Reducing the regulatory burden on these businesses where possible is something we strongly support.

'It is, however, paramount that any potential changes to the UK reporting requirements for our smallest businesses do not reduce access to reliable financial information or send misleading signals about the importance of sound financial management.'

He said that now the UK — along with other EU member states — had been given free rein to determine their own rules for the smallest companies, it 'is a good time to revisit the debate about the FRSSE (Financial Reporting Standards for Smaller Entities), and how a reporting regime can be designed for all small companies that is fit for purpose - there is still important work to do in this area.'

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