Budget zone

Budget 2008: VAT changes

Registration limit

The VAT registration threshold rises from £64,000 to £67,000 from 1 April 2008.
The turnover limit for deregistration will be increased from £62,000 to £65,000.

VAT exemption for fund management

Group 5 of Schedule 9 to the VAT Act 1994 will be amended from 1 October 2008 to delete trust-based schemes and add closed-ended investment entities, which invest in securities and whose shares are included in the UK Listing Authority main Official List and funds established outside the UK, which are recognised overseas schemes under the Financial Services & Markets Act 2000.

Indirect tax returns: correction of errors

From 1 July 2008 the £2,000 limit below which errors on previous VAT, returns may be corrected on the return for the period in which the errors are discovered will be increased to the greater of:

i) £10,000, or
ii) 1 per cent of turnover, subject to an upper limit of £50,000.

A similar will apply to corrections of returns of insurance premium tax (IPT), air passenger duty (APD), landfill tax (LFT), climate change levy (CCL) and aggregates levy (AGL).

This change will benefit many taxpayers although the ability to "bury" very sizeable errors on subsequent returns could be open to abuse and it remains to be seen how HMRC will police the use of this provision.

Fuel scale charge

The fuel scale charges will increase significantly from the start of the next VAT accounting period beginning on or after 1 May 2008. For example, for a car with CO2 emissions over 235g/Km the quarterly VAT charge will be £71.94, compared with £63.45 above the current maximum of 240g/Km.

Reduced rate retained on smoking cessation products

To continue to support citizens trying to quit smoking the Chancellor announced that the reduced VAT rate of 5 per cent for ‘over the counter’ sales of pharmaceutical smoking cessation products will continue to have effect from 1 July 2008. This was due to expire on 30 June.

Transitional period for claims

We were expecting this one after the House of Lords judgments in January 2008 in Michael Fleming (trading as Bodycraft) and Condé Nast Publications Ltd.

This affects businesses registered for VAT between 1 April 1973 and 1 May 1997 who either declared more output VAT than they were liable for, or claimed less input VAT than entitled to.

The Finance Bill 2008 will provide a transitional period to 31 March 2009, during which businesses can make claims for overpayments (or further re-claims) of VAT accrued before the introduction of the three-year cap on 1 May 1997 – in other words, for periods between 1 April 1973 and 1 May 1997 - before they become subject to the three-year time limit.

Assessments to recover amounts incorrectly paid by HMRC to businesses who claim under these provisions must be made within two years of HMRC having acquired evidence of facts, sufficient to justify the making of the assessment. There will now be a new two-year time limit from the end of the accounting period in which an erroneous payment is made to ensure that HMRC are able recover amounts paid out where it is later discovered repayment was mistaken.

Option to tax

There will be some welcome simplification of the not-at-all simple rules for the option to tax land and/or buildings from 1 June 2008, and some minor changes to enable taxpayers to revoke an option to tax after 20 years. The earliest date an option to tax will be revocable will be 1 August 2009.

There will also be a number of associated changes to improve practical administration of the option to tax and its revocation, including:

• opted properties held in a VAT group;
• opted buildings acquired for use as dwellings or relevant residential purpose and bare land acquired for construction of building for such purposes;
• the introduction of a new option to simplify the option to tax process for taxpayers with a number of properties;
• early revocation of an option to tax within a “cooling-off” period;
• the automatic lapse of an option to tax six years after the taxpayer ceased to have any interest in a property that they had previously opted to tax;
• the ability, in certain circumstances, to exclude a new building from a previous option to tax; and
• late applications for permission to opt to tax.

Withdrawal of the Staff Hire Concession

There is currently a concessionary arrangement whereby employment businesses are allowed to exclude the wages element from the value of supplies of temporary workers, and to account for VAT solely on their margin. This concession will be withdrawn with effect from 1 April 2009.

This could have a serious impact not only on employment bureaux but also any of their customers who are not able to fully recover the VAT charged to them e.g. finance sector, health and care sector, education sector, charities and some parts of the public sector. However, as this change was first proposed back in 2006 most should have been making arrangements to minimise the impact of the change.