Budget 2009 - commentaries - VAT and other direct taxes

"The commentaries below are written in general terms. Further information can be found in our Budget brochure, which will be available from the afternoon of 23 April 2009. You are strongly recommended to seek specific advice before taking any action based on the information given, both in the commentaries and in the publication."

Change in standard rate

Following the change in the standard rate from 17.5% to 15% from 1 December 2008, the Chancellor has confirmed that the 15% rate will continue to apply until 31 December 2009, and will return the standard rate of VAT to 17.5% from 1 January 2010.

Comments

The return to the standard rate of VAT to 17.5% is likely to cause businesses administrative problems previously encountered when the rate was reduced to 15%. However, as there is a long lead up to this change, businesses have time to ensure that they are well prepared, and are aware of the invoicing and time of supply rules. Converting back to 17.5% may also affect profit margins and increase costs to businesses and charities unable to fully reclaim VAT.

Change in standard rate: Anti-forestalling legislation

Anti-forestalling measures are being introduced to prevent suppliers from avoiding the increased rate by issuing an invoice or receiving payment before the date of the change, which would otherwise fix the VAT rate at 15%.

The legislation to take effect from 25 November 2008 prevents forestalling by introducing a supplementary charge of 2.5% to VAT on the supply of goods or services where the customer cannot recover all the VAT on the supply and one of the conditions below is met:

the supplier and customer are connected parties; or
the supplier funds the purchase of the goods/services; or
a VAT invoice is issued by the supplier where payment is not due for at least six months

With effect from 31 March 2009, a provision has also been introduced which applies a supplementary charge of 2.5% where a pre-payment in excess of £100,000 is made before the rate rises in respect of goods or services to be provided on or after the date of the rate increase. If the pre-payment is in accordance with normal commercial practice the supplementary charge will not be applied.

Comment

This legislation was expected following the chancellor's decision to reduce the standard rate of VAT to 15% until 31 December 2009. Businesses should still consider making their supplies of goods and services and issuing invoices before the change in rate inline with normal business practices in order to maximise the benefit of the 15% rate.

VAT registration limits

The annual turnover limit beyond which compulsory VAT registration is required will be increased from £67,000 to £68,000.

The turnover limit which determines whether a business may apply for deregistration will be increased from £65,000 to £66,000.

The registration and deregistration limits for acquisitions of goods from other EU Member States will be increased from £67,000 to £68,000.

These changes are effective from 1 May 2009.

Comment

These changes are lower than the changes that took effect in the previous two years, but are consistent with earlier increments of £1,000 or £2,000 per annum.

Fuel scale charges

With effect from 1 May 2009 new private use VAT charges will be introduced.

Businesses must use the new fuel scale charge in their first accounting period beginning on or after 1 May 2009. The new fuel scale charges will be updated in HMRC Notice 700/64 which should be available from HMRC's website and the National Advice Service shortly.

SDLT: Temporary increase in thresholds.

The existing 12 month SDLT holiday for residential property costing £175,000 or less has been extended from 2 September 2009 to 31 December 2009. After that date, the threshold will revert to £125,000.

Comment

The Government would have found it difficult to nip the green shoots of revival in the property market by re-introducing the 1% rate so early. All other rates are unchanged.

SDLT: Leasehold enfranchisement

With effect from 22 April 2009, SDLT relief will be available for all who are exercising the statutory rights of leasehold enfranchisement. Previously relief was only available to statutory Right to Enfranchise (RTE) companies but the legislation creating these companies has never been brought into force.

Comment

The relief will now be available to nominees and appointees who acquire the freehold of a block of flats on behalf of the leaseholders, which is apparently as was always intended.

Excise duty increases

The duty on alcoholic drinks will be increased by 2% for all alcoholic drinks, with effect from 23 April 2009.

The duty rate for tobacco products is to increase by 2% which will take effect from 6pm on 22 April 2009.

The fuel duty rates were increased by 1.84 pence per litre and will be further increased on 1 September by 2 pence per litre and then by 1 pence per litre every April for the next four years. It was also confirmed that the current duty differential of 20p per litre for biofuels for road use will cease from 2010 and duty will thereafter be charged at the same rate as main road fuels.

EU ‘VAT Package' legislation - VAT refund procedure

A new electronic refund procedure will be introduced across the EU whereby a business will be entitled to reclaim VAT incurred overseas in the country in which it is established effective from 1 January 2010. UK businesses will be required to submit claims for overseas VAT electronically on a standardised form to HMRC rather than direct to the EU country where the expenditure was incurred. The following changes are to be applied to the new system:

the deadline for making the claim will be extended to nine months from the end of the calendar year in which the VAT was incurred rather than 6 months
the deadline for HMRC to make the repayment has been reduced to four months unless further information is requested in which case it can be extended to eight months
interest will be due on repayments if not made by the deadline
a right of appeal will be afforded against non-payment

Extension to the reduced rate for children's car seats

The 5% reduced rate of VAT for children's care seats will be extended to include bases for the car seats. The new rate will take effect on or after 1 July 2009 and will be introduced by a Treasury Order.

Comment

It is a shame that the reduced rate has only been extended to one item.

EU ‘VAT Package' legislation - EC Sales List

Businesses will be required to submit EC Sales list for each calendar quarter (and monthly in some cases) on all supplies of services which will be treated as a reverse charge supply by the customer in their EU member state. This is effective from 1 January 2010.

Comment

This change brings the administrative treatment of the supplies of services to EU member states in line with the supply of goods and will be a further administrative burden on businesses.

EU ‘VAT Package' legislation - time of supply rules

Effective from 1 January 2010, the tax point for cross border supplies will be primarily when the service is performed rather than when it is paid for. This change takes into account the normal rules for single and continuous supplies.

Comment

This is a welcome change for UK businesses as they can now account for reverse charge supplies under the normal tax point rules as if the supply was received from a UK supplier.

EU ‘VAT Package' legislation - place of supply of services rule

The new rule is designed to move the responsibility for accounting for VAT with regard to business to business supplies to the country in which the service is received (establishment of customer) and will take effect from 1 January 2010.

Comment

The new rules should simplify determining where the liability for VAT is due.

Option to tax

Businesses which have made exempt supplies of land or property and wish to opt to tax them in order to reclaim VAT on related costs require HMRC's formal permission, unless they meet one of the four automatic permission conditions.

New measures are being introduced from 1 May 2009 to replace one of these conditions where the VAT relates to a surrender of a lease which should enable more businesses to make an option without seeking permission from HMRC.

In addition, an informal concession relating to VAT recoverable once the option is made will be withdrawn and another will be partly withdrawn. HMRC will publish further guidance in an information sheet shortly.

Comment

Any measure to allow more businesses to opt to tax without seeking permission from HMRC is welcome.