Finance and Tax Blog for individuals and companies

Finance Act 2012 has introduced from 17 July 2012 the new group 16 to Schedule 9 to the VAT Act 1994 which deals primarily with the Cost Sharing Exemption provision.

The exemption applies when two or more organisations (whether businesses or otherwise) with exempt and/or non-business activities join together on a co-operative basis to form a separate, independent entity, a cost sharing group (CSG), to supply themselves with certain services at cost and exempt from VAT. As a result a ‘cooperative self-supply’ arrangement (a term the EU Commission use) is created.

The exemption applies to supplies of certain qualifying services that are made by the representative member of the CSG to other members of the CSG. These supplies can include ancillary goods only must be ‘directly necessary’ for the exempt and/or non-business supplies made by the individual qualifying member.

The CSG is a separate taxable person from that of its members. It is therefore able to make supplies for VAT purposes to its members. These supplies will be exempt if the relevant conditions are met. This type of arrangement enables the creation of the same economies of scale for smaller businesses and organisations as larger businesses and organisations naturally enjoy. Thus the more members of a CSG there are the greater the potential savings and lower the costs per member of operating the relevant CSG.

The cost sharing exemption which is mandatory applies only in very specific circumstances and will not cover all shared service arrangements.

There are five conditions attached to the exemption:

1. There must be an ‘independent group of persons’ (a CSG) supplying services to persons who are its ‘members’.
2. All the members must carry on an activity that is exempt from VAT or one which is not a business activity for VAT purposes.
3. The services supplied by the CSG, to which the exemption applies, must be ‘directly necessary’ for a member’s exempt and/or non-business activity.
4. d) The CSG only recovers, from its members, the members’ individual share of the expenses incurred by the CSG in making the exempt supplies to its members.
5. The application of the exemption to the supplies made by the CSG to its members is not likely to cause a distortion of competition.

All these conditions have to be satisfied for a supply to be exempt.

If any of the conditions are not met the supplies will be taxable.

HM Revenue & Customs (HMRC) has just issued an alert to VAT-registered businesses across the UK about important changes that come into effect next year.

From 1 April 2012, all VAT-registered businesses must send their VAT returns online and pay their VAT electronically. The new rules will cover VAT returns filed for accounting periods beginning on or after 1 April 2012.

Currently, this file and pay VAT online has applied since 1 April 2010 only newly-registered businesses, and those with turnovers of more than £100,000.

However, for many businesses not already filing their VAT Returns online, switching now before the deadline would enable them to enjoy the benefits of online filing sooner rather than later.

These benefits include:

• an automatic acknowledgement from HMRC that your return has been received;
• an arithmetic checker to help make sure you have done your sums correctly; and
• an email alert to remind you when your next online return is due

It should be noted that after April, HMRC will stop sending out paper returns to businesses that are now required to file online.

HMRC also plans to introduce from October 2012 that all businesses will be able to go online to obtain a VAT registration number, and notify most variations to their registration details (such as a change of address or to deregister) online.

On 1st June 2012 HMRC published the latest version of Notice 742 which cancels and replaces the previous version in March 2002. The notice explains when transactions involving land and buildings are exempt from VAT.

In summary details of the changes made are:

• Updates 1, 2 and 3 to the previous version have been incorporated within the body of the text where appropriate;
• The notice reflects changes in HMRC’s interpretation of the law;
• In particular it should be noted:
  • Paragraph 2.5 – definition of ‘licence to occupy land’
  • Paragraph 4.4 – guidance on parking for dwellings, and
  • Paragraph 7.8 – guidance on the treatment of land and buildings on hand at deregistration

VAT registered businesses that were VAT registered before 1 April 2010 and have a turnover of less than £100,000 currently have the option to continue filing paper returns. However from April 2012 they also will have to submit VAT returns online and pay any VAT due electronically.

This may be the time to consider joining the VAT Flat Rate Scheme (FRS) subject to meeting the turnover limit of £150,000 inclusive of VAT and other eligible conditions to further simplify VAT bookkeeping and obtain administrative as well as cost efficiency savings.

Normally the VAT businesses pay to HMRC is the difference between the VAT they charge their customers (output tax) and the VAT paid on purchases (input tax). Using FRS businesses pay over a lower fixed percentage of VAT of their VAT inclusive turnover. The actual applicable percentages set by HMRC depend on each category of business and are available from the HMRC website. For new business start ups applying at the outset FRS on VAT registration the rate is cut by 1% for the first year of such registration.

Before applying to use the FRS it is necessary to compare the amount of VAT you would be required to pay over to HMRC compared with the amount that may be payable under FRS. In particular businesses that have mixed supplies: standard rate; reduced rate; zero rate; and exempt from VAT should calculate any likely savings.

Examples:

ABC Chartered Architects working mainly from home have a turnover of £120,000 per annum on which they charge VAT of 20%. The costs on which they incur VAT are relatively low e.g. broadband and telephone, some IT costs, travelling expenses, publications and periodicals. Other costs e.g. staff, professional subscriptions etc., are exempt from VAT. Overall costs amount to say, £8,000 on which they incur VAT of £1,600. Under normal VAT accounting they would have charged their customers output tax of £24,000 (£120,000 * 20%) less input tax of £1,600 above giving an overall liability of £22,400.

The flat rate percentage for Chartered Architects is 14.5% and so under FRS they would pay £20,880 (£120,000 + £24,000 * 14.5%) saving of £1,520 every year under current rates. In addition there may be cost savings on bookkeeping.

Examples of other fixed percentage rates applying are;

• Estate agents and property management services 12%
• Freelance journalists 12.5%

HM Revenue & Customs (HMRC) has just issued an alert to VAT-registered businesses across the UK about important changes that come into effect next year.

From 1 April 2012, all VAT-registered businesses must send their VAT returns online and pay their VAT electronically. The new rules will cover VAT returns filed for accounting periods beginning on or after 1 April 2012.

Currently, this file and pay VAT online has applied since 1 April 2010 only newly-registered businesses, and those with turnovers of more than £100,000.

However, for many businesses not already filing their VAT Returns online, switching now before the deadline would enable them to enjoy the benefits of online filing sooner rather than later.

These benefits include:

• an automatic acknowledgement from HMRC that your return has been received;
• an arithmetic checker to help make sure you have done your sums correctly; and
• an email alert to remind you when your next online return is due

It should be noted that after April, HMRC will stop sending out paper returns to businesses that are now required to file online.

HMRC also plans to introduce from October 2012 that all businesses will be able
to go online to obtain a VAT registration number, and notify most variations to
their registration details (such as a change of address or to deregister) online.

With effect from 1 January 2012 HMRC have notified that there is a rule change to the VAT treatment on salary sacrifice arrangements. In most cases such arrangements are offered to employees to give them an efficient post tax return while otherwise complying with the tax code.

The change follows from the case of AstraZeneca UK Limited v HMRC, where the European Court of Justice (ECJ) held that VAT was due on the amount of salary sacrificed by employees in exchange for high street shopping vouchers. As a result of this decision, HMRC has indicated in its recently published Revenue & Customs Brief 28/11 that VAT must be accounted for on amounts of salary sacrificed by employees in exchange for relevant benefits from 1 January 2012.

VAT is a tax charged on the supply of goods or services by a VAT registered business. As a result of the decision where an employer provides certain benefits to its employees it may be treated as a supply of services for VAT purposes on which VAT should be charged. This may increase the tax cost to the employee on a potential benefit in kind charge although the employer may nevertheless be able to recover this charge as input tax against its business supplies.

However, HMRC have now announced a transitional tax break to help employers take account of the continuance of such arrangements:

• Where a salary sacrifice arrangement where in place on 27 July 2011 but extend beyond 1 January 2012 there is no need to account for VAT on the benefits provided until the employee’s concerned remuneration package is reviewed

Where a firm supplies services, it is essential to know the ‘place of supply’ for VAT purposes in order to decide on the correct VAT treatment to be applied to your overseas customers. Therefore, it is important to establish the status of and type of service your firm is making to its overseas customers. This determines which country’s VAT rules should be used and how you have to account for the VAT on such a sale. There are various rules that apply with regard to deciding the place of supply of services, depending on:

• whether you have more than one business location
• the kind of service you provide
• the place where your business or your business customer ‘belongs’

In particular it should be noted that the VAT rules in the UK for the place of supply of services changed on 1 January 2010 in relation to overseas customers. In practice HMRC refer to such services as either “B2B” or “B2C”. B2B refers to a supply being made business to business while B2C refers to a supply being made from business to a non-business customer.

If you are in the UK and the place of supply of your service is in the UK, you charge and account for VAT according to UK VAT rules. If you are in the UK and the place of supply of your service is in another EU country or outside the EU, the supply is outside the scope of UK VAT.

As mentioned above B2B services are supplies from one business to another business and are treated as made where the customer belongs. No UK VAT is chargeable on a B2B supply as it is outside the scope of VAT although it is normal for the customer to account for any local VAT in the country to which it belongs.

The position on B2C supplies is however different and depends on where your customer is based:

• If they are based outside the EU e.g. China, Hong Kong or the USA there is no UK VAT charge
• If, however, they are located in another EU country then UK VAT must be charged unless the customer concerned can provide proof that they are in business. For an EU customer a local VAT registration number would be sufficient
• If there is no VAT registration number available then you needs to establish if your customer is being treated as in business by the local tax authorities

Following announcements in Budget 2010 and 2011 HMRC published on 28 June 2011 a consultation document on a possible model for the introduction of a VAT Cost Sharing Exemption. The document takes into account representations received from interested parties over the past 12 months.

The VAT Cost Sharing Exemption is a provision in European law that allows businesses and organisations making VAT exempt and/or non-business supplies to form groups to achieve cost savings and economies of scale. Once formed the groups are relieved of a VAT charge on their supplies if all the conditions of the exemption are met. HMRC have looked at the following principles in developing the options for the implementation of cost sharing.

• Could be used by a wide range of sectors.
• Is straightforward to operate, minimising compliance and administrative burdens.
• Does not create opportunities for abuse or avoidance.

This consultation invites comments on a possible model for a cost sharing exemption that could be introduced in the UK and will be welcome to financial services organisations.