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As always, there have been a number of developments in the VAT world recently. This month’s VATflash covers a range of issues, from the Alternative Dispute Resolution to design and build contracts.

HMRC piloting Alternative Dispute Resolution (ADR)

As part of their ongoing Litigation and Settlement Strategy, HMRC are currently piloting formal ADR procedures to allow for some disputes to be settled by mediation and avoid the need for formal appeals.  This can be useful in cases where the dispute is over the interpretation of the facts or some form of methodology rather than black and white legislative treatments, and is worth considering as an alternative to the normal Reviews or Appeals.

Cultural exemption

We have found that many charitable or not-for-profit organisations looking after museums, theatres, galleries, etc. are not taking advantage of the cultural exemption from VAT on admission charges.  The knock-on effect is that the organisation will not be able to reclaim input VAT on associated costs, but the saving of VAT from the income should normally outweigh this.  Affected organisations should consider whether they are able to submit claims for output VAT accounted for over the past four years less the input VAT loss.

Compulsory online filing

Smaller businesses should note that from 1 April 2012 all VAT registered businesses will be required to file their VAT returns online.  Although we believe that HMRC are still consulting on whether or not to allow some exceptions to this, these are likely to be in only a very few cases so all VAT registered businesses should prepare for online filing.

Costs of corporate acquisitions

In a recent case heard before the Upper Tribunal it was held that a special purpose company set up to acquire the shares in a target could not reclaim the substantial input VAT incurred on the professional costs.  Although HMRC are likely to challenge many such cases, the key points arising from the decision are to ensure that the acquiring vehicle will not just be a passive holding company receiving future dividends but will be actively involved in the management of the new subsidiaries once acquired to facilitate the entitlement to reclaim input VAT.

Taskforce regarding fast food outlets

In line with their current program of targeting specific trade sectors for closer investigation, HMRC have set up a new taskforce that will focus its attentions on fast food outlets.  HMRC will start visiting outlets soon, conducting research through ‘test purchases’ and visits so they can check their receipts against your records.

Consultation on a cost sharing exemption

For many years, HMRC have refused to implement a mandatory exemption set out in European VAT law on the grounds that there was no demand for it in the UK.  This is now being consulted upon and will benefit many exempt and not-for-profit organisations who will be able to share costs of providing exempt services without creating VAT hits on the inter-company cross-charges.

Staff agencies

The recent Reed Employment case found that Reed was only liable to account for VAT on its commission element and not the full value charged to its clients for the supply/ introduction of temporary staff.  HMRC have sought to play down the decision by saying it does not apply in other instances, as the case concerned previous legislation that is no longer in force.  Whilst this is true as far as it goes, the principles from the case concerning how VAT applies to staff agencies and any business supplying or introducing staff are still very relevant and need to be considered in light of the current legislation.

Pension funds

Those eagerly awaiting the next instalment in the long-running saga over the VAT treatment of pension fund management can relax knowing that the argument has been referred to the European Court for the Ford pension scheme.  One point that has come out of this is that the reference to the European Court only concerns the management of defined benefit schemes and not defined contribution schemes where the investment management service remains subject to VAT for now, apart from any cross-border aspects that may affect this.  Those who have lodged protective claims with HMRC in relation to the management of defined contribution schemes will have to reconsider their position now as HMRC are likely to invite the affected claimants to withdraw their appeals currently stood over at the First Tier Tribunal.

Design and build contracts

Readers of our recent VATflashes will remember that we highlighted an unwelcome announcement from HMRC that they were revoking the long-standing VAT treatment of design and build contracts which would have had a major impact upon the charity sector in particular.  In the face of fierce criticism from all the professional and industry bodies and VAT groups, HMRC have seen sense and retracted the proposals.  In addition to the pressure applied by charities to make HMRC reverse their decision, this was one of the best concerted actions by all the professional and industry bodies seen for a long time and it achieved the right result.