VAT consultation
HMRC have published a consultation document on the European Court of Justice's judgment in Arthur Andersen & Co Accountants (C-472/03) concerning the VAT exemption for insurance-related services. Comments are welcome, particularly with regard to
- how the judgment should be interpreted;
- the changes that are to be made to the existing UK insurance VAT legislation;
- when those changes should be implemented; and
- how implementation is likely to impact on UK industry and policyholders.
Responses should be sent to HMRC by 30 September 2005.
Business Brief 14/2005 dated 28 July 2005
Partial exemption
Business Brief 14/2005 gives HMRC's views on the tribunal's decision in National Provident Institution (18944), which concerned the recovery of input tax by an insurance company that made supplies of securities outside the EU.
NPI made three types of supply for VAT purposes:
- taxable supplies of property (which it had opted to tax);
- exempt supplies of insurance (pensions, life assurance and annuities), exempt supplies of securities in the UK and in the EU; and
- specified supplies of securities outside the EU.
NPI was entitled to recover input tax on overheads that related to its taxable supplies and to its specified supplies and sought to do this through a single combined calculation on the basis of values. HMRC had not approved that calculation and did not consider that it achieved a fair and reasonable result. Customs therefore applied a two-stage calculation using, firstly, a staff count and secondly values.
The tribunal concluded that HMRC's method was unsafe. In the circumstances, since no other method had been put to the tribunal, it held that the use of residual input tax in making specified supplies should be determined according to the proportion that the value of specified supplies bore to the value of all supplies.
HMRC have decided not to appeal because the decision was made on the facts of the case. They do not consider that it has any wider application for that reason.
Notwithstanding this, HMRC consider that sales of securities will normally be distortive when included with other sorts of supply in a combined values-based calculation. They state that any proxy for use that secures a fair and reasonable apportionment of input tax to specified supplies is acceptable. In the right circumstances, HMRC will not object to a values-based method for calculating recovery of input tax in respect of specified supplies. It will rarely, however, be acceptable to mix securities with other different activities in a single outputs-based calculation. In such cases, a values-based approach will not give a fair and reasonable result because it is likely to significantly under- or over-state the extent to which input tax is used in making recoverable supplies.
Business Brief 14/2005 dated 28 July 2005
VAT avoidance
HMRC's Business Brief 14/2005 announces changes to the rules relating to VAT avoidance schemes. There are three main changes to the rules as follows.
First, two new listed schemes are added to those whose use must be disclosed by taxpayers having an annual turnover of more than £600,000. The new schemes involve the use of cross-border face-value voucher schemes involving telecommunications, broadcasting or electronically supplied services and the surrender or termination of certain taxable leases of buildings, where the tenant remains in occupation of essentially the same area of the building, but following the surrender or termination pays no or substantially less VAT on the rent.
Secondly, a new hallmark is added to the hallmarked schemes whose use must be disclosed by businesses with an annual turnover exceeding £10 million. The new hallmark concerns the issue of face value vouchers with either low expected redemption rates, or those issued to other members of the same corporate group (except members of the same VAT group). Most VAT avoidance schemes involving vouchers in the past have had one or other of these features. Disclosure is only required if the issue is part of a scheme with a main purpose of gaining a VAT advantage.
The new schemes and hallmark are contained in the VAT (Disclosure of Avoidance Schemes) (Designations) (Amendment) Order SI 2005 No 1724).
Thirdly, the Finance (No 2) Act 2005 amends the definition of 'tax advantage' to include, subject to conditions, schemes that are intended to reduce any person's irrecoverable VAT, even when there is no effect on a VAT return, e.g. because none of the VAT being avoided would have been deductible as input tax.
Subject to transitional arrangements, these changes will apply to schemes that generate a tax advantage in VAT accounting periods beginning on or after 1 August 2005, and includes schemes that started before 1 August 2005.
HMRC have also published clarification of the confidentiality hallmark. There were concerns that a literal interpretation of the legislation would result in any tax advice that was subject to such a general confidentiality condition falling within the hallmark. HMRC have confirmed that the confidentiality hallmark is aimed at confidentiality conditions that are intended to protect the competitive advantage of a promoter or creator of the scheme over other promoters. HMRC's interpretation of the legislation is that a confidentiality condition does not fall within the hallmark if it is simply a general confidentiality condition that is imposed in relation to all advice, not merely the scheme in question.
HMRC also announced that VAT Notice 700/8 (August 2004), 'Disclosure of VAT Avoidance Schemes', is being updated and will be reissued shortly.
Business Brief 14/2005 dated 28 July 2005
