Pre-Budget Report 2009 commentaries - VAT & other indirect taxes
"The commentaries below are written in general terms. Details can also be found in our downloadable Pre-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."
Temporary change in rate
As previously announced the Chancellor has confirmed the end of the temporary reduction in the standard rate of VAT of 15% on 31 December 2009. As of 1 January 2010 the standard rate of VAT will return to 17.5%.
The return to the standard rate of 17.5% will include some transitional rules allowing businesses trading across the midnight deadline to continue with the lower 15 per cent rate until they close (or until 6 a.m., whichever is earlier). There are also plans to let shops add the extra VAT to prices at the tills for up to 28 days, giving them extra time to complete the re-pricing of their stock.
There are also some complicated anti-forestalling rules that were also previously announced to stop businesses taking prolonged advantage of the 15% rate after 1 January 2010. These rules add a supplementary charge of 2.5% VAT in certain circumstances.
Comment
The Chancellor believes the temporary VAT rate reduction has delivered stimulus of about £11.5bn into the economy. However whether this is accurate or not and how this could have been measured is unclear.
The change in the VAT rate is again likely to cause many businesses some administrative issues.
There are special rules dealing with tax points for supplies that cross the VAT rate change. These rules should be reviewed by all businesses to ensure the correct rate of VAT is applied to purchases and sales.
Flat rate scheme
The VAT rates under the flat rate scheme are also amended to reflect the end of the temporary reduction of the standard rate of VAT and the latest data on VAT payments by the various sectors.
The percentages were re-calculated in December 2008 to reflect the temporary reduction in the standard rate of VAT. The flat rate percentages have now been re-calculated to reflect the reversion of the standard rate of VAT to 17.5% and the new rates will be implemented on 1 January 2010.
Virtually all sectors are facing an increase (as a result of the increase in the standard rate) but some sectors increases will be greater than others.
Comment
This is to be expected following the rise in the standard rate of VAT, but what is unclear is how much the flat rate percentages have been increased as a result of the rate rise and how much of it is just a general increase.
Cross border VAT changes 2010
As previously announced, the place of supply of services is to change and secondary legislation is to be introduced. A single statutory instrument has been prepared for all changes which amend the VAT Regulations and will come into effect on 1 January 2010. The VAT Regulations are in respect of the following:
- changes to the time of supply for cross-border supplies of services where VAT is accounted for by the business customer;
- new requirements to record intra-EU supplies of services that are taxable in another EU country on a EC Sales List;
- changes to the requirements for recording the intra-EU movement of goods on EC Sales Lists; and
- a new method for reclaiming VAT incurred in another EU country (EC 8th Directive claims).
Comment
This is the final stage of the UK implementation of what has been widely referred to as the ‘VAT package’. It is the most fundamental change in EU VAT since it was adopted and will no doubt lead to a number of practical problems on or after 1 January 2010. Until businesses become more aware of the new rules and the EU member states become more co-ordinated there may be some confusion in relation to these measures, especially the requirement to submit EC Sales Lists for services.
Insurance Premium Tax (IPT)
IPT is paid by an insurer on the gross premium charged under a taxable insurance contract, which includes any commissions or fees unless they are charged to the insured under a separate contract. Legislation will be introduced to close an avoidance scheme involving so called ‘administration fees’ charged under a separate contract.
The legislation brings certain fees charged under a separate contract in connection with personal lines insurance into the scope of IPT. The legislation will have effect for payments made on or after 9 December 2009.
The legislation will be changed under primary legislation to specify that for insurance contracts with private individuals, the provision defining a ‘separate contract’ excludes contracts that are entered into at or about the same time as the insurance contract and are:
- contracts for services that would usually form part of the insurance contract; or
- where the insured is required to enter into both contracts together, or would be unlikely not to.
Separate charges for amendments to the insurance contract or for paying for insurance by credit/debit card or by instalments are specifically excluded from this measure. Charges made for services provided in connection with insurance contracts with businesses and other organisations are not covered by the new legislation.
Comment
This measure was widely anticipated following a recent High Court case, Homeserve Membership Limited vs. The Commissioners [2009] EWHC 1311 (Ch), in which the taxpayer successfully argued that they supplied private individuals with separate insurance and administration services with the administration services not subject to IPT. This is also another example of the Government cracking down on perceived tax avoidance.
Climate change levy – increase in reduced rate
Gas and electricity utilities, and other suppliers involved with the climate change agreements scheme are currently able to claim the 20% reduced rate of climate change levy for facilities in energy intensive sectors. All claimants must certify to their energy suppliers the extent of their entitlement to the levy relief.
The reduced rate of the climate change levy of 20% is to be increased to 35% through the introduction of secondary legislation in 2010. The new reduced rate will have effect for supplies of taxable commodities treated as taking place on and after 1 April 2011, with the requirement to give new certificates having effect on and after 1 April 2011. Any new certificates required must be given by the completion of the claimant’s first annual review after that date.
Comment
This measure appears to be revenue raising to help fund their environmental initiatives. Although businesses that have entered a Climate Change Agreement still benefit from a lower climate change levy, it is not as favourable as before.
Disclosure of Tax Avoidance Schemes: SDLT
The Government proposes to extend the Disclosure of Tax Avoidance Schemes (DOTAS) regime to include disclosure by users of certain stamp duty land tax (SDLT) avoidance schemes that concern residential property with a value of at least £1 million. These new rules will also apply to schemes that concern a mixture of residential and non-residential property where either:
- the value of the residential property is at least £1 million; or
- the value of all the property is at least £5 million.
The rules will include a ‘grandfathering’ provision that will exempt from disclosure any scheme which was first made available for implementation before the date the new rules come into force.
In addition, disclosure will be required by users of SDLT schemes for non-residential property exceeding a value of £5m. Previously it was only the promoter that was required to disclose.
It is proposed that this extension to the DOTAS regime will be in force by 1 April 2010.
Comment
The extension of the DOTAS regime to include notification of transactions relating to residential property is not surprising in light of the Government’s continued aim to target tax avoidance schemes. Requiring users to disclose the use of SDLT schemes should be a useful aid to identifying the extent to which SDLT schemes are used, whether residential or non residential. The threshold of £1 million is interesting but should certainly not be taken as HMRC approving of or turning a blind eye to SDLT planning that yields less than £40,000 of tax. DOTAS is a disclosure obligation only – it does not deal with the SDLT legislation.
Stamp duty & SDRT anti avoidance: transfers of shares to depository receipt systems and clearance services
The recent European Court of Justice (ECJ) ruling in HSBC Holdings Plc and Vidacos Nominees Ltd v Commissioners for HMRC upheld the exemption from 1.5 per cent stamp duty or SDRT charge when new shares are issued to an EU clearance service or depository receipt system.
Legislation will be introduced in the Finance Bill 2010 to reduce the scope of this exemption for shares intended for a non-EU clearance service or depository receipt system that are routed through an EU clearance service.
This anti avoidance measure will have effect for transfers made on or after 1 October 2009.
Comment
Whilst we await the draft legislation, the exemption from stamp duty and SDRT arising from the recent ECJ ruling has created the potential for shares to be issued to a non-EU depository system or clearance service avoiding stamp taxes altogether, which was obviously not the intention. These anti avoidance measures will close down this possibility retrospectively.