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VAT Changes with effect from 1st April 2009

 

HMRC have announced a number of changes in relation to VAT, each effective from 1st April 2009. These changes are summarised below and, in the case of Retail Schemes and Adjustment of errors, are self-explanatory. If you are affected by the changes relating to Partial Exemption, the Staff Hire Concession or Bad Debt Relief, you may wish to speak with your adviser in order to assess the impact – or potential impact – on your business.

Retail Schemes

Some retailers, who may not have been entitled to operate a retail scheme in order to calculate the amount of output tax payable to HMRC, should be aware of the revised turnover limit introduced with effect from 1st April. This has been increased to £130m. For businesses with a turnover in excess of this it is still possible to negotiate with HMRC a bespoke retail scheme to suit the specific circumstances of the business.

Time limits for adjustment of errors

With effect from 1st April 2009, the time limit for the adjustment of errors is to be increased to 4 years. This will not be retrospective but, in the case of errors made on or after 1st April, businesses will have 4 years in which to make any necessary adjustments.

Partial Exemption

The changes in relation to Partial Exemption fall into 2 categories – optional and compulsory. HMRC’s stated aim is to simplify matters and reduce compliance costs!

Optional measures

1. Provisional Recovery Rate

Businesses may use, on a quarter by quarter basis, the recovery rate determined by the annual adjustment carried out at the end of the previous VAT year.
Thus, if in the VAT year 2008/9 the annual adjustment produces a recovery rate of, say, 65%, this may be used for each VAT accounting period during 2009/10. At the end of the VAT year in 2010, an annual adjustment should then be carried out as usual and this will be used

1. as the basis for adjusting any under or overpayment of VAT, and
2. as the provisional recovery rate to be used during the next VAT accounting year.

 

2. Early Annual Adjustment

Instead of waiting until the end of the VAT accounting period following the VAT year end a business may, if it wishes, now carry out the annual adjustment immediately and make the necessary adjustment on the last return of the VAT year.

Please note, however, that this does not apply, in the current year, to businesses with a VAT accounting period ended on 31st March. The option is only available with effect from 1st April and therefore only applies to VAT accounting periods ending on 30th April 2009 or later.

3. Recovery based on ‘Use’ rather than the standard turnover method

This option is only available to businesses that have recently become partly exempt, and is available to them to use for a limited period only – as a rough guide, for the first year to 18 months from the date that the business enters the partial exemption regime.

‘Use’ is not defined and it can sometimes be a problem trying to reach agreement with HMRC as to what this actually means. If, therefore, you fall into this ‘newly partly exempt’ category and consider that the standard method of calculating recoverable VAT is not fair and reasonable, do take advice.

Compulsory measure

This change is compulsory although in practice it will affect only those partly exempt businesses that make overseas supplies and which previously had to carry out 2 separate calculations. By combining UK and overseas supplies in one calculation some businesses may need to reconsider the methodology used and take appropriate advice.

The effective date for this change is VAT accounting periods commencing on or after 1st April 2009.

The Staff Hire Concession

It has been threatened for a number of years and the staff hire concession was finally withdrawn on 1st April.

This will affect many businesses making supplies of staff as principal as they will now have to account for VAT on the full value of their supply. Clients in the exempt sectors will be hardest hit, as they will often be unable to recover VAT charged in respect of supplies received.

Please note, however, that Recruitment businesses acting as agents will not be affected.

Bad Debt Relief

A recent VAT Tribunal decision (Times Right Marketing Ltd.) has resulted in a change to the treatment of VAT Bad Debt Relief claims. The change in treatment could be good news for taxpayers as it potentially allows for credit to be taken in circumstances when the output tax for the period in question has not actually been paid.

In order to make a claim for bad debt relief there are a number of conditions to be fulfilled. One of these is that output tax due on the supply must have already been paid.

HMRC now accept that payment of output tax will be taken to have been made, to the extent that output tax is covered by deductible input tax. Consider the following example:

Period 03/08 shows output VAT of £200k, which includes tax of £120k in respect of supplies that become bad debts.
Input tax in the period is £110k.

The business, suffering from lack of payment from the customer, does not make the net payment due of  £90k.

In period 09/08 bad debt relief will be claimable – not in respect of the full £120k, as the net tax due in that period has never been paid, but to the extent of  £30k, being the difference between the bad debt and the input tax for the period in question.

The other conditions relating to Bad Debt Relief claims are not affected and these must still be met.

Jane Roffey
7th April 2009