Draft Finance Bill 2011 Clauses published 9?December 2010 included those for a VAT Supply Splitting measure. Following on from the draft legislation, HMRC received a number of responses the common theme of which was that it seemed the legislation had the potential to have a far wider impact than actually intended.

HMRC have now sought to allay those concerns by setting out their interpretation of the legislation in initial guidance. This includes an explanation of how the legislation is intended to apply by addressing some of the examples set out in responses received which it is hoped demonstrates that the scope of this legislation is limited to the areas targeted.

By way of background, the intention of these draft clauses is to withdraw zero-rating from printed matter where the printed matter is ancillary to a differently rated service, and where, if the service and printed matter had been supplied by a single company, the two supplies would have been treated as a single standard rated, reduced rated or exempt supply.

This measure is specifically targeted at a VAT avoidance scheme being used to reduce the amount of VAT due where a business supplies a service together with printed matter that is ancillary to that service.

HMRC state that this legislation will only apply where there is a supply of printed matter, which is ‘connected with’ a supply of services, and each is provided by a different supplier. In this context ‘connected with’ is given a specific meaning not as widely drawn as some respondents to the draft legislation had interpreted it to be. HMRC advise in particular, that supplies will only be regarded as connected if they would have been treated as a single supply of (standard rated, reduced rated or exempt) services had they been made by a single supplier.

Supplies may be regarded as connected in some other technical or non-technical sense, but that will not in itself be enough to bring the proposed legislation into play.

The approach to be adopted by HMRC when considering whether there has been a single or multiple supply is described on their website at http://www.hmrc.gov.uk/manuals/vatscmanual/VATSC82800.htm

The legislation will only apply if the supply of printed matter is connected with a supply of services. It will not apply if there is a supply of printed matter which is connected with a supply of goods.

Furthermore, the legislation will only apply if the supply of printed matter and the supply of services would fall to be treated as a single supply of services. If on the assumption that they had been made by a single supplier the supply would have been treated as a supply of goods (for example if the supply of printed matter was properly regarded as the principal supply to which the supply of services was ancillary), then the legislation will not apply.

HMRC also set out a number of examples by way of illustration.

For more information go to http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal?_nfpb=true&_pageLabel=pageExcise_ShowContent&propertyType=document&columns=1&id=HMCE_PROD1_031262

HMRC announce initiative to target VAT evasion

HMRC announced a forthcoming initiative to crack down on VAT evasion. The new campaign will focus on individuals and businesses who are trading above the VAT threshold but who have not yet registered for VAT.

The initiative is initially being discussed with interested parties before launching the campaign later in the summer. This is part of a new approach by HMRC aimed at getting as much input as possible into future campaigns at the outset so that the views and experience of individuals and organisations outside HMRC play a fuller role in such initiatives going forward.

HMRC advise that this process of initial discussion will be the model for all future campaigns with a view to more openness about the compliance activity HMRC is undertaking.

For more information go to: – http://nds.coi.gov.uk/clientmicrosite/Content/Detail.aspx?ClientId=257&NewsAreaId=2&ReleaseID=419593&SubjectId=36