VATflash October 2011

Welcome to your October VATflash. This month we have provided you with general updates on a range of VAT developments and highlighted key areas where you may encounter problems with HMRC.

Salary sacrifice schemes

In our August VATflash we discussed the impact of a recent European case which found that goods and services provided to employees under a salary sacrifice scheme are within the VAT system. New rules relating to this will be enforced on 1 January
2012. HMRC have now issued more guidance which details how schemes entered under the old rules can remain free from VAT until either the agreement is renegotiated or the employee has their post 1 January 2012 annual salary/ benefits review.

Consultation on VAT clearances

HMRC have recently announced a consultation on a clearance mechanism for VAT which has always been resisted up to now. This will enable businesses to seek clearance for the VAT treatment of a particular transaction in advance. At present,
businesses make a self-assessed decision which HMRC often challenge, rightly or wrongly. The professional bodies will be making representations so if you have any comments regarding this speak to your usual UHY partner who will feed them into the process.

Insolvency Practitioners (IPs)

Following the Paymex decision a short while ago, which held that IPs’ services for Individual Voluntary Arrangements (IVAs) were exempt from VAT and not standard-rated, there has been some confusion over whether the decision also applied to Company Voluntary Arrangements (CVAs) and Partnership Voluntary Arrangements (PVAs) where the IP’s services are very similar. In a recent, quite confusing Brief, HMRC have announced that IPs should decide the VAT treatment of their services themselves, however HMRC will only be applying the Paymex decision to IVAs. This decision seems to go against the principles of VAT as it should be the nature of the services that determines VAT treatment, not the status of the client. Until an IP challenges the current position, however, CVAs and PVAs will remain subject to VAT.

Business records checks

HMRC are to extend the current program of checks on the adequacy of records kept by small and medium sized businesses. The taskforce has had a four-fold increase in staff and HMRC are planning on completing 12,000 visits to businesses by the end of the financial year, with 20,000 visits planned for the following year. Although initially saying they will only levy penalties where the record keeping is extremely poor, this is to be extended to cover what HMRC calls “serious inadequacies in record keeping”.

Compound interest

A further reference has gone to the European Court of Justice asking whether HMRC should be required to pay compound interest to a taxpayer who was disadvantaged by a HMRC mistake, opposed to the simple interest set out in UK legislation. Having already lost several cases on this matter, HMRC are now fighting a rearguard action and at a recent meeting with professional bodies explained that the reason they were resisting it was that “… taxpayers would find the application of compound interest difficult to understand.” If HMRC were required to pay compound interest on the thousands of disadvantaged businesses already known about, the sheer scale of the Treasury’s liability would add significantly to the Treasury’s economic woes. This, understandably, presents questions as to the real reason behind their resistance.

Customs duty

Moving on to other forms of indirect tax, HMRC have recently announced that they are tightening up the rules on IPR (Inward Processing Relief) which gives relief from Customs Duty on goods entering the UK temporarily. Broadly speaking, you must get the paperwork right, irrespective of the fact that the goods may indeed have left the UK, or they will collect Customs Duty anyway. Those businesses affected may wish to read Customs Information Paper (11) 81 for more details.