On 1 April this year, VAT celebrated its 40^th birthday. What had started out as intending to be a simple flat rate of tax at 10% has grown, with varying increases and decreases in rates over the years, into an ever increasingly complex tax at a maximum (standard) rate now of 20%. I only have to look at my own VAT library to see how the volume of VAT legislation and related material has expanded over the years. Whilst happily my own VAT library or recollection does not extend quite as far back as the 1972 Finance Act which introduced the original VAT legislation from 1^st April 1973, this legislation was reportedly 50 pages long and my most recent legislation book now extends to almost 3,000 pages on VAT!

It has become increasingly important to ensure accurate compliance, with taxpayers now also subject to a more regimented format of penalty regime and less scope for HMRC discretion in relation to penalties. Economically stringent times, decreased bank lending and constraints on cash flow have also left taxpayers exposed to severe surcharges for late payment of VAT return liabilities. Timely recognition of planning opportunities in relation to VAT and forward planning to ensure accurate application of VAT rules can save business lives. This article will look at some of the more recent developments and take a look back at some methods of mitigating VAT cash flow.

EU VAT Net Widens

Croatia is the latest country to join the EU, having become a Member State on 1 July 2013 and with a standard VAT rate of 25%. Whilst the imposition of EU VAT is compulsory for Member States and there is a common basic framework, domestic rules vary from country to country. In addition, the VAT rules in relation to doing business with a non-EU country and an EU country differ. Any UK business carrying out business with or in Croatia needs to ensure that they are compliant with the changeover and the Croatian VAT rules, where applicable. This change will be of particular application to a range of transactions, a few examples being:

• Goods supplied from/to Croatia previously import/export transactions are now intra EU transactions with resultant changes in VAT compliance;
• UK e-tailers and mail order businesses making distance sales to private individuals in Croatia will be subject to UK VAT at up to 20% until the distance selling threshold is breached, thereafter VAT registration in Croatia will be required with VAT applicable at up to 25%;
• EU place of supply rules may impose VAT registration requirements in Croatia.

Property

The specific area of VAT & Property continues to grab my own attention and interest with its constant evolution and complexity.

Transfer of a Going Concern (TOGC)

Recent cases include the Robinson Family case TC02046 [2012], a local Northern Ireland Tribunal case on TOGC which led to a change of policy by HMRC. The policy change concerns the determination of when a VAT-free TOGC occurs and is set out in Revenue & Customs Brief 30/12, issued on 16 November 2012.

When the assets of a business (or part of a business) are transferred as a going concern, as long as certain conditions are met, no supply of those assets takes place for VAT purposes. One of the conditions is that the purchaser must intend to use those assets to carry on the same kind of business as the vendor. For property development or property rental businesses, HMRC had interpreted the law as meaning that the interest in land being transferred must be the same interest as that used by the transferor in his business. Accordingly, if what was transferred was less than the transferor's full interest in the land, then retaining an interest would prevent there having been a TOGC.

Robinson Family Limited, a property development company, had purchased a 125 year interest in a site owned by Belfast Harbour Commissioners and due to underlying title constraints the Robinson Family company was unable to assign its full interest in the site, being the 125 year lease. Accordingly, Robinson Family Limited granted a sublease interest of 125 years less three days to a purchaser subject to, and with the benefit of, a proposed letting. HMRC relied solely on the argument that Robinson Family Limited could not have transferred all or part of its business as a going concern, because it did not assign the full term of its lease to the purchaser.

However, the Tribunal found that, although Robinson Family Limited retained the head lease, the transfer of the lesser interest was sufficient to put the transferee in the position to carry on the same business of property letting. Following on from the case, HMRC has now updated its policy and stated that, if the value of the interest retained is no more than 1% of the value of the property immediately before the transfer (disregarding any mortgage or charge), the transfer is capable of being a VAT-free TOGC. It will be interesting to see if this 1% de minimis gets challenged itself in later cases and HMRC are already reviewing other aspects of their policies on TOGC including whether a surrender of an interest in land is capable of being a TOGC.

As a result of this case output VAT historically over declared may be reclaimed from HMRC subject to normal time limits and rules. Since SDLT is paid on VAT inclusive consideration, a reduction for overpaid VAT also results in overpaid SDLT, which HMRC has now confirmed may also be reclaimed in accordance with Revenue & Customs Brief 08/13 (which was issued on 15 April 2013).

Letting of Conference Rooms

HMRC confirmed its new policy from 22 January 2013 to apply VAT to all function rooms for catered events, irrespective of who provides the catering i.e. even if the letting of the room is on a room only basis. This new policy is included in Revenue & Customs Brief 02/13 and all the rules in relation to the letting of such rooms are included in HMRC's updated Notice 709/3 Hotels and Accommodation recently released in June 2013. An area of interest, as the VAT status of the letting of rooms in hotels or any other building has a direct impact on input VAT recovery particularly if there has been significant expenditure which incurred VAT.

Cash Flow

As mentioned above, cash flow for businesses can be critical and a periodic review should be carried out by businesses to ensure they are maximising their use of available assistance from HMRC and availing of VAT rules which can ease VAT outflow.

Time to Pay Arrangements

Constrained cash flow has led to an increased use of applications by taxpayers for Time to Pay Arrangements with HMRC. Such applications are made via the Business Payment Support Service within HMRC in the first instance. If a Time to Pay Arrangement is agreed with HMRC, and contact with HMRC and application was initially made in advance of the due date for the payment of the particular VAT liability, then any VAT surcharge payable shall be withdrawn by HMRC.

The correct timing of the contact with HMRC and initial application for the arrangement is critical to ensuring a withdrawal of the surcharge. Negotiations may be lengthy and the surcharge notice may be automatically issued by HMRC but a withdrawal should be pursued if the initial contact and application was made at the correct time. There have also been numerous Tribunal cases on proportionality and the relative size of the surcharge.

Flat Rate VAT Scheme (FRS)

Whilst the limits are low for this scheme, it is one to consider for small businesses and interestingly in a recent case Geoffrey Seeff t/a TPL Associates v HMRC TC02738 [2013], Mr Seeff, a Chartered Accountant, was successful in a claim for retrospective authorisation to use the VAT Flat Rate scheme (FRS).

An unusual case where the Tribunal considered “It is not a simple case of a business being unaware of the FRS, or simply realising after the event that less tax would have been paid under the FRS. It is a case where reasonable expectations proved unforeseeably to be catastrophically wrong, to the extent that the Appellant fell far short of the threshold for registering for VAT at all, and where the Appellant is now suffering considerable financial hardship.” Nevertheless, it may potentially be worth considering a retrospective FRS claim particularly should there be late VAT due by a taxpayer and there are sufficient grounds to persuade HMRC that the case warrants retrospective application of the scheme.

Output VAT Accounting & Timing

The increase in the UK VAT rate to 20% in 2011 has focused attention on the timing of accounting for Output VAT. There are a number of areas to consider in this regard including cash accounting, issuing a pro-forma invoice or ‘request for payment’ and VAT bad debt relief.

The cash accounting limits are now currently £1.35m for joining the scheme and £1.6m for leaving the scheme, so will cover a significant number of businesses. This method of VAT accounting can be of significant cash flow benefit for particular businesses so long as it does not impose overly burdensome administration requirements on the business.

Issuing a pro-forma invoice or ‘request for payment’ is not a VAT invoice and does not create a tax point for VAT i.e. the trigger for accounting for Output VAT. The document should not have the features of a VAT invoice and should be marked as ‘This is not a VAT invoice’. This method can be used to delay the tax point, at which Output VAT is triggered, until the receipt of payment for the supply or a basic tax point is otherwise reached by completion of a service or delivery of goods.

Alternatively, if Output VAT has been accounted for but receipt of payment has been delayed beyond normal payment terms, a business can reclaim the Output VAT from HMRC pending the receipt of the debt. Detailed rules are required to be complied with but generally debts over six months old should be reviewed for a potential VAT bad debt relief claim.

Summary

Close attention to VAT and its application for businesses is necessary as VAT legislation, HMRC's interpretation and case law continues to evolve, and the global reach of transactions extends at the same time as the global supply chain widens. The above was current at the time of going to print! Specialist advice should be taken as required.

Lyn Hagan is Tax Partner with Goldblatt McGuigan Chartered Accountants

Tel: 00 44 28 90311113

Email: haganl@goldmac.com