The Budget 2010 commentaries - VAT & other indirect taxes
"The commentaries below are written in general terms. Details can also be found in our downloadable Budget Report brochure. You are strongly recommended to seek specific advice before taking any action based on the information given, both in the commentaries and in the publication."
VAT registration limits
The annual turnover limit beyond which compulsory VAT registration is required has been increased from £68,000 to £70,000.
The turnover limit which determines whether a business may apply for deregistration will be increased from £66,000 to £68,000.
The registration and deregistration limits for acquisitions of goods from other EU Member States will be increased from £68,000 to £70,000.
These changes are effective from 1 April 2010.
Comment
These changes are in line with the usual £1,000 or £2,000 per annum increments over the last decade.
VAT changes to zero rating of aircraft
The definition of ‘aircraft’ for suppliers of aircraft and associated parts and services for aircraft will be changed with effect from 1 September 2010.
The definition of a qualifying aircraft for zero rating purposes will be changed from the current definition based on weight and usage to one based on the status of the customer. Only supplies of aircraft that are to be used by airlines operating on primarily international routes will qualify for zero rating.
Comment
This change in the legislation was expected following the European Commission’s formal request that the UK amend its legislation governing the zero rating of VAT transactions related to the supply of aircraft in June last year. The changed legislation aligns the UK VAT legislation with Article 148 of the Principal EU VAT Directive.
This will result in many businesses involved in aircraft industry having to incur VAT in relation to purchases of aircraft, general maintenance, repairs etc where the aircraft are to be used domestically. If the aircraft is to be used for business purposes and used to generate taxable income, the VAT incurred will be recoverable, meaning this will only result in a cash flow disadvantage. However, this will have most impact where aircraft are privately used as there will be a VAT charge suffered that cannot be recovered.
Exemption for postal services
The exemption for postal services is being restricted to the supply of public postal services by the Royal Mail in the UK. As a result, postal services which are ‘individually negotiated’ with the Royal Mail will be subject to VAT at the standard rate.
Services that can continue to be exempt are those which are supplied under a licence duty by the Royal Mail as well as most regulated services – this includes all social mail, including stamped mail.
The services that will be subject to VAT include all supplies that are not subject to a licence duty and where the services are provided on terms and conditions that are freely negotiated (including Parcelforce supplies). Lists of the exact services that are to be standard rated by the Royal Mail have been published by HMRC in its technical note in relation to these changes.
In addition, the VAT treatment of passenger transport services made in conjunction with postal services by the Royal Mail will also be zero rated. These changes will take effect for all supplies made on or after 31 January 2011.
Comment
This legislation was expected following the decision of the ECJ in TNT Post UK Ltd (C-357/07) which found that the UK had applied the exemption for postal services more widely than is permitted by EU law. This will affect many charities and businesses that are unable to recover the VAT incurred on their costs in full and that have used the Royal Mail for their postage needs in the past. In future, more supplies will now attract VAT and could lead to a considerable increase in their costs, especially in the case of charities that use the Royal Mail to distribute and send promotion materials.
Fuel scale charges
With effect from 1 May 2010, new scale charge rates will be introduced to reflect changes in fuel prices. The new fuel scale charges will be updated in HMRC Notice 700/64 which should be available from HMRC's website and the National Advice Service shortly.
Reverse charge for emissions allowances
The UK has introduced a reverse charge for the buying and selling of any emissions allowances, this is to replace the interim zero rating provisions that were introduced in July 2009. There is no requirement for suppliers to submit reverse charge sales lists for these supplies. HMRC may also introduce an option of introducing reporting requirements in respect of supplies of emissions allowances as with other Missing Trader Intra-Community (MTIC) fraud. The reverse charge will have effect from 1 November 2010 with the zero rating provisions being removed from the same date.
Comment
This legislation was again expected following the recent cases of MTIC fraud that occurred last year across the EU. The zero rating provisions were always a temporary measure and they were introduced as an immediate measure to combat the threat of fraud at the time. This should be a welcome change for all businesses involved in this sector, provided the option of introducing the reporting requirements is not too onerous if it is adopted.
Removal of Lennartz accounting
HMRC has introduced legislation to remove the application of the Lennartz accounting mechanism for the recovery of VAT for immovable property, boats and aircraft. This will take effect from 1 January 2011.
HMRC will also introduce legislation such that existing users of the Lennartz mechanism, where the VAT has already been claimed upfront, will be required to continue to account for output VAT on the private use of the assets.
In addition, the Capital Goods Scheme (used for partially exempt businesses) will be amended to include changes in private use (non-business use) so that adjustments will have to be made each year if the level of private use changes from year to year.
Comment
This legislation was amended as a result of changes in EU legislation contained in EC Council Directive 2009/162/EU. This measure will affect cashflow for smaller businesses and traders that use assets for both private and business use as well as charities and colleges that use buildings for both business and non-business use.
Cost sharing exemption
The government has acknowledged that in principle the EU cost sharing exemption that is applied in many other EU member states could be considered for the UK. This allows charities and other businesses to centrally incur costs and recharge them on a cost sharing basis without the addition of VAT. HMRC has stated that the government will seek to work with charities and other affected sectors to consider the options for implementing this measure in the UK.
Comment
This will mean that VAT will not need to be added to certain costs that are shared between various parties which will be a welcome move for charities and other areas where cost sharing is commonplace and where any VAT incurred is irrecoverable due to the nature of the business (for example a collection of GP’s surgeries ).
Aggregates levy – increases
The rate of aggregate levy will increase from £2.00 per tonne to £2.10 per tonne for any aggregate commercially exploited on or after 1 April 2011.
Landfill tax - increases
The standard rate of landfill tax will increase to £48 per tonne from £40 per tonne with effect for disposals of waste made, or treated as made, on or after 1 April 2010. This will increase by a further £8 per tonne to £56 per tonne with effect from 1 April 2011.
Landfill communities fund contribution increased
The contribution level for contributions made to bodies concerned with the environment which enables landfill operators to claim this amount against their annual landfill tax liability has been changed to 5.5% from 6%. HMRC estimate that this will result in an additional £2.25m of claimable credit next year. This will take effect from 1 April 2010.
Landfill tax – lower rate clarification
HMRC has announced that it will introduce legislation to clarify what materials will qualify for the lower rate of landfill tax. This will apply from 1 October 2010.
Climate change levy (CCL) – increases
The rates of CCL will increase for supplies of taxable commodities treated as taking place on or after 1 April 2011. The new rates can be found in the table in the Appendix.
Air passenger duty rates
As announced at the 2008 PBR, the rates of air passenger duty will increase from 1 November 2010. The current and increased rates are included in Appendix [XX]. The changes will have effect for flights on or after 1 November 2010, irrespective of when the ticket was booked.
Comment
Air passenger duty has increased significantly in recent years. Whilst originally introduced as an environmental measure, the exclusion of private jets means that it is really the average holiday-maker who is affected, rather than frequent business flyers who have access to private jets.
Stamp Duty Land Tax (SDLT) and partnerships
Partnerships attract special rules for SDLT purposes, and have been used to reduce the amount of SDLT on transactions depending on the degree of connection between purchaser and vendor. The anti-avoidance rules that charge SDLT on a notional land transaction value where the SDLT on actual scheme transactions is lower than if there was no ‘scheme’ referred back to the partnership rules for property transactions involving partnerships, thus offering an opportunity to avoid the application of this anti-avoidance.
For transactions with an effective date on or after 24 March 2010, Budget 2010 proposes to change the legislation so that the partnership rules do not apply to notional land transactions for the purpose of the anti-avoidance rules. Instead the consideration will be based on the largest amount given or received as part of the scheme transactions.
Comment
It remains to be seen how the wide scope of s75A FA2003 will be applied in practice to partnership transactions and it is interesting to note that it is the anti-avoidance legislation that has been changed rather than the partnership rules for SDLT.
Stamp duty land tax (SDLT) headline rates
The threshold below which SDLT did not apply on residential property moved from its temporarily increased threshold of £175,000 back to £125,000 on 1 January 2010. The 2010 Budget has announced a temporary increase to the zero rate threshold to £250,000 for first time buyers who buy residential property in the period 25 March 2010 to 24 March 2012.
The rate of SDLT on residential properties where the consideration exceeds £1m will increase to 5% instead of 4%. The higher rate will apply for transactions with an effective date (usually at the date of completion) on or after 6 April 2011.
Comment
The temporary increase in the zero rate threshold is welcome assistance to those who are truly first time buyers. A first time buyer will exclude those who have previously owned or inherited a property whether located in the UK or not. It also excludes those who are buying a house for the first time together with someone who has previously owned a property, however there are some provisions to permit the zero rate to apply to certain shared ownership transactions. It is not yet clear how compliance with respect to the purchaser’s ownership history will be checked.
The introduction of a 5% rate of SDLT will make the top rate of SDLT 1% higher for residential properties than for commercial properties. However it is unlikely to deter purchasers at this end of the market.