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HMRC Withdraws VAT Concessions

by Jason Gorringe, Tax-News.com, London

29 December 2010


The UK tax authority, HM Revenue and Customs has announced the withdrawal of a number of extra statutory concessions, in particular on value-added tax (VAT), in a technical note.

The concessions are being removed as they do not comply with European Union VAT law, and are as part of a larger revision to the United Kingdom's law in that regard.

The concessions proposed to be repealed are as follows:

Misunderstanding by a VAT trader

HMRC proposes to repeal a concessionary arrangement which allows the taxman not to collect VAT and Insurance Premium Tax from taxpayers who have paid too little due to a genuine misunderstanding of the law. The arrangement is to be withdrawn from January 1, 2012.

VAT: Connection to the gas or electricity mains supply

HMRC is to repeal, also from January 1, 2012, an arrangement which allows first time connection to utilities to be treated as zero-rated for VAT. The concession currently allows zero-rating for first time connection to the gas or electricity mains supply of dwellings, communal residential and non-business charitable buildings, residential caravans and houseboats. After the concession is repealed, the initial connection of electricity or gas will be subject to the reduced rate of VAT if the utility is for domestic or non-business charity use and the connection charge is made by a person who supplies the fuel. VAT chargeable made by caravan site owners or houseboat mooring providers will depend on their individual circumstances, more detail for which is in HMRC's guidance.

Recharge of non-domestic (business) rates at caravan sites

This concession allows caravan site owners to treat the recharge of business rates as outside the scope of VAT. This concession is to be withdrawn from January 1, 2012.

A caravan site owner will generally be liable to pay non-domestic (business) rates to the Local Authority if the caravans on the site are used for holiday or leisure purposes. Currently, it is common practice for those site owners who pay business rates to recharge the cost of those rates on to individual caravan occupiers as part of the fee for occupying the caravan pitch. Such recharges should follow the same VAT liability as the rest of the pitch fee (usually standard rated). However, by concession, HMRC currently allows the portion of the pitch fee that reflects the business rates cost to be treated as outside the scope of VAT.

Once the concession is withdrawn, the recharge of business rates by caravan site owners will follow the same VAT liability as the rental of the caravan pitch (usually standard rated).

Withdrawal of the concession however will not affect caravan occupiers who pay council tax.

Recharge of water and sewerage rates at caravan sites

The current concessionary arrangement which allows caravan site owners to zero-rate water and sewerage charges where actual consumption cannot be identified will be withdrawn from January 1, 2012.

When a caravan site owner can identify the actual consumption of water and sewerage for individual caravan pitches (i.e. through metering) and charges according to consumption, there is a separate zero-rated supply of water and sewerage. In other circumstances, i.e. where individual consumption cannot be identified, any charges for water and sewerage form part of the fee for occupation of the pitch and should follow the same VAT liability as the pitch (exempt, in the case of permanent residential sites, standard rated if the pitch is seasonal).

Once the concession is withdrawn, charges made by caravan site owners for water and sewerage will remain zero rated if actual consumption can be identified (i.e. through metering). In other circumstances, charges will follow the VAT liability of the caravan pitch (exempt, if a permanent residential site, standard-rated if a seasonal site).

Zero-rating of motor vehicles adapted after initial supply

The current concessionary arrangement, which allows a motor vehicle supplied to a disabled wheelchair user to be treated as a zero-rated supply if the vehicle was adapted shortly after it was supplied to the disabled person will be withdrawn with effect from January 1, 2012. This concession affects disabled wheelchair users who buy motor vehicles and then adapt them for their personal use.

HMRC has said that VAT zero-rating will however be available on motor vehicles that are adapted before the vehicle is being supplied provided all other qualifying conditions for zero-rating are met.

Zero-rating of parts and accessories for boats supplied for disabled people

HMRC has said that the current concessionary arrangement which allows VAT zero-rating on the supply of parts and accessories designed solely for use in, or with, boats that are designed or permanently and substantially adapted for use by disabled persons is to be withdrawn, again from January 1, 2012.

Currently, VAT zero-rating applies to parts and accessories designed solely for use or with goods eligible for zero-rating in Item 2 of Group 12, Schedule 8, VAT Act 1994, except for Item 2(i), which relates to boats designed or adapted for use by disabled persons or charities that make them available for disabled persons. A concession was therefore introduced to apply zero-rating to parts and accessories designed or adapted for use in or with boats.

VAT zero-rating however will continue to be available on the supply of:

  • Boats that are designed or substantially and permanently adapted for the domestic or personal use of disabled persons;
  • Parts and accessories that are used in connection with repairs or maintenance to qualifying boats; and,
  • Parts and accessories that are included as part of the single supply of qualifying boats.

Corporation tax: cemeteries: lump sums for grave maintenance etc.

Lastly, HMRC is to withdraw the availability of a practice which modifies the tax treatment of lump sums received by cemetery businesses for long-term maintenance of graves and monuments, with effect from corporation tax accounting periods commencing on or after January 1, 2012.

This practice affects companies which run a cemetery business and are chargeable to corporation tax on trade profits within Part 3 of the Corporation Tax Act 2009 (“CTA 2009”).

A cemetery business sometimes gets a lump sum for the maintenance in perpetuity of a grave or monument or for decoration of the grave. These sums are receipts of the trade carried on by the cemetery business. The extent to which such receipts (and expenditure incurred on grave maintenance etc) are recognised in the accounts of the business normally follows generally accepted accounting practice. Generally accepted accounting practice matches receipts and expenses to determine how much profit has been earned in a period. The lump sum is brought into account gradually over the years in which the grave is maintained. The profit found by applying generally accepted accounting practice is accepted for tax purposes unless it does not represent “the full amount of the profits” as required by section 8 of CTA 2009. For example, an over-conservative reserve may have been made for the future costs of grave maintenance. If the cemetery business invests the lump sum, any income arising from the investment is taxable as investment income and not as trade profits.

The practice allows a cemetery business to dispense with the calculations needed to find the amount of profit earned each year in respect of such lump sums. Instead, the lump sum is left out of account but the income earned from investing it is brought in as a trade receipt (and not taxed as investment income). The actual costs of grave maintenance etc are allowed as a deduction in the period.

The practice gives preferential treatment to cemetery businesses over other businesses which receive advance payments for later work. It displaces the normal UK tax rules for advance payments. It is not capable of being replaced by legislation and must therefore be withdrawn. Lump sums of this nature will be brought into account in accordance with generally accepted accounting practice and tax rules on charging the full amount of profits. Any income earned from investing the lump sum will be taxed as investment income.

The withdrawal of the practice will take effect for lump sums received during corporation tax accounting periods of cemetery businesses commencing on or after January 1, 2012, HMRC has said. Further, income received from the investment of lump sums will be treated as investment income for corporation tax accounting periods commencing on or after January 1, 2012.

TAGS: compliance | tax | business | marine | value added tax (VAT) | law | accounting | corporation tax | United Kingdom | legislation | charities

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