VAT News March 2016

With the Budget behind us we look towards news on possible changes to VAT rates.

Finance Bill 2016
The Finance Bill 2016 (actually the Finance (No 2) Bill 2016, which will become the Finance Act 2016) was published on 24 March. The Bill contains 179 clauses and 25 schedules, running to 571 pages. The clauses and and schedules which relate to VAT are as follows:
Cl 111 VAT: power to provide for persons to be eligible for refunds
Cl 112 VAT: representatives and security
Cl 113 VAT: joint and several liability of operators of online marketplaces
Cl 114 VAT: Isle of Man charities
Cl 115 VAT: women’s sanitary products.


Increased flexibility for Member States on reduced rates

Following the meeting of the European Council on 17-18 March 2016, it was announced (Press Release 143/16 dated 18 March 2016) that “The European Council notes that the Commission intends to publish shortly a communication on an action plan on VAT. It welcomes the intention of the Commission to include proposals for increased flexibility for Member States with respect to reduced rates of VAT, which would provide the option to Member States of VAT zero rating for sanitary products.”

Publication of the Commission’s Action Plan was expected in March but has been delayed. When published it will be of interest in the UK as it may provide both opportunities for review of the UK’s zero-rates, but potential threats to the retention of some zero-rate reliefs.


HMRC Policy paper – zero-rating of women’s sanitary products
Following the European Council press release on increased flexibility for reduced rates (see above), HMRC issued a Policy Paper on the zero-rating of women’s sanitary products. The paper can be accessed here.

Modernising the VAT Disclosure Regime (VADR)
The government intends to consult over the summer on reform of the VAT Disclosure Regime (VADR) to expand coverage to other indirect taxes and align more closely with the Disclosure of Tax Avoidance Schemes (DOTAS) model which covers direct taxes.

Penalty for participating in VAT fraud
As announced in the Budget, the government will consult on the idea of a new penalty for participating in VAT Fraud. The consultation document will be published in spring 2016. Following consultation, if the government decides to legislate, draft legislation will be published for further consultation, with the intention of introducing legislation in Finance Bill 2017.

VAT road fuel scale charges from 1 May 2016
The VAT road fuel scale charges are amended with effect from 1 May 2016. Businesses must use the new scale charges here from the start of the next prescribed accounting period beginning on or after 1 May 2016.


Pre-registration input tax 

Lepton Service Station Ltd applied for voluntary VAT registration in February 2014. HMRC refused to allow the company recovery of input tax in respect of services invoiced (in September 2013) more than six months before the date on which the company was actually registered for VAT (1 April 2014), and also refused to backdate the date of registration.The Tribunal observed that  the VAT Act 1994 allowed an applicant for voluntary registration to have one of two registration dates, either the date on which the application was made or an earlier date as agreed between HMRC and the applicant.  In this case, the application for registration was made in February 2014. As the taxpayer did not request or agree an earlier date (i.e. one earlier than its date of application), HMRC was under an obligation to register the taxpayer from February 2014. As this was the only lawful registration date, the invoices in question were within the time limit of six months laid down the VAT Regulations and the taxpayer was entitled to deduct the input tax on the invoices so the appeal was allowed.

Why it matters: It is always important to check that HMRC have applied the correct registration date, even when applying for voluntary VAT registration. In this case HMRC got the effective date wrong, which was to the detriment of the company’s VAT recovery.

Pub conversions – whether sales zero rated or exempt

This case concerned the conversion of a former pub into four maisonettes and their subsequent sale. The pub comprised the ground floor, used wholly for commercial purposes, and two upper floors which were used wholly for domestic purposes. The conversion involved the addition of an additional floor; the creation of two new maisonettes side by side occupying the existing domestic upper floor and the new floor; and the creation of two new maisonettes side by side occupying the existing commercial ground floor and the existing domestic first floor. The VAT Act provides that where commercial buidlings are converted into dewellings, the first sale of a long lease in the dwellings is zero-rated.  HMRC argued that because all four maisonettes contained parts of the building that had originally been used for domestic purposes the sale was exempt, with the result that the appellant would not recover VAT on the conversion costs. Before the case reached the FTT, it was accepted by both parties that the sales of the two upper maisonettes were exempt from VAT because they did not involve conversion of a non-residential part of a building so the remaining questions related to the sale of hte lower maisonettes which incorporated the old commercial ground floor.

HMRC relied on Calam Vale Limited (VTD 16869), in which it was held, in similar circumstances, that a pub converted into two dwellings did not fall within the relief because it did not constitute only the conversion of a non-residential part of a building, but the conversion of that part plus a residential part. However the FTT preferred the analysis in Alexandra Countryside Investments Limited [2013] UKFTT 348 in which the non-residential part had been combined with a residential part to form two new dwellings. As there was originally one dwelling in the building before conversion, and two dwellings after conversion, the FTT held that the conversion zero-rate applied. The FTT was concerned that the decision in Calam Vale did not fully take account of the social purpose and context of the conversion legislation (to encourage the development of derelict brownfield sites). HMRC’s interpretation would effectively rule converted mixed-use buildings out of zero rating. The appeal was allowed.

Why it matters: this is a welcome clarification of the meaning of the legislation for mixed use sites.  Any taxpayer who has previously been denied recovery of input VAT on the basis of a ruling based on HMRC’s  Calam Vale approach may wish to consider making a new claim.