Private tuition
The recent VAT tribunal decision in Empowerment Enterprises Ltd (18963) found that the VAT exemption for private tuition extended to tuition provided by directors of limited companies and those employed by sole proprietors, partnerships or limited companies. HMRC appealed against the tribunal's findings and the Court of Session allowed the appeal (CRC v Empowerment Enterprises Ltd, see Update, Taxation, 14 December 2006, page 275), confirming that exemption is only available to sole proprietors and partnerships.
Following this decision, HMRC therefore confirm that all suppliers of private education should ensure that they are applying the correct liability to their supplies and should account for any unpaid VAT if they have been using the incorrect liability.
HMRC Brief 05/07, 6 February 2007
VAT and yachts
HMRC are concerned that some VAT schemes are being used with the result that private individuals incur little or no VAT on the purchase of pleasure craft, both sailing and motor vessels, particularly at the top end of the market. They have published a brief describing the key features of the schemes and explaining their 'serious concerns' about the validity of the VAT treatment which is claimed for the schemes.
The schemes fall broadly into two categories: cross-border leasing and artificial chartering to the private funder. Both categories share the following common features:
- They involve a contrived leasing or chartering arrangement of a vessel which is predominantly for the recreational use of an individual.
- The individual provides the funds that are used to pay for the vessel either directly or indirectly (maybe by lending money to an intermediary).
- Registered title to the vessel is held by a special purpose entity which is controlled, directly or indirectly, either by the individual or by the scheme provider. This may be a shell company bought off the shelf and with nominee directors standing in front of whoever really benefits.
- The special purpose vehicle purports to use the vessel in a chartering or leasing business. It does not incur VAT, either through a zero-rated export if it is outside the EU, or otherwise by recovering as input tax any VAT charged on the supply.
- The vessel is chartered or leased to the individual. No VAT (or only a minimal amount of VAT) is charged on the lease or charter payments.
HMRC say that they will carry out 'a full investigation' where 'there is evidence to suggest that a vessel has been supplied through one of these schemes'.
HMRC Brief 11/07, 6 February 2007
VAT fuel charge
HMRC have recently announced changes to the VAT fuel scale charge. These changes will come into effect on 1 May 2007 and businesses must use the new scales from the start of their first accounting period beginning on or after this date. The existing VAT fuel scale charge, which is based on the engine size and fuel type of a car, will be replaced by a fuel scale charge based solely on the carbon dioxide rating of a car. The new table, which mirrors that used for direct tax purposes, will have 21 bands with 5g/km increments. An outline of the bands is produced at www.hmrc.gov.uk.
The complete new table, which will be available following Budget 2007 as an amendment to Notice 700/64 Motoring Expenses, will provide business with the actual scale charge for a car within a particular band. Apart from the change to a carbon dioxide basis, the system will operate in exactly the same way as the existing VAT fuel scale charge.
In keeping with the existing fuel scale charge, the new system will be subject to an annual review to ensure that the charge reflects changes in fuel prices. The figures produced at Budget 2007 will have been reviewed and, as with the current system, will be extant for one year.
Many businesses will already be aware of the underlying concept of the CO2 based system from using direct tax schemes, as well as the new system for vehicle excise duty. For businesses unaware of their CO2 rating, a number of publicly available websites provide details on vehicles' official CO2 emission levels, e.g www.vcacarfueldata.org.uk/search/search.asp.
HMRC Brief 13/07, 12 February 2007
Bad debt relief
HMRC have published a brief discussing changes to the bad debt relief provisions in respect of claims relating to goods supplied on credit terms, including hire-purchase, conditional sale and credit sale agreements. The new rules reflect existing commercial accounting methods and are intended to result in a more accurate bad debt relief figure for the supplier.
Where a business supplies goods on credit, they make two supplies — goods (taxable) and credit (exempt). The supplier must account for VAT on the supply of goods at the outset (the normal time of supply rules apply). However, sometimes agreements are terminated because customers default.
If a customer makes some of the periodic payments before defaulting, these payments will cover both the goods and interest. In order to work out the amount of bad debt relief claimable on the goods, the supplier will need to look back at the payments the customer made before defaulting and allocate them between the goods and interest. The supplier will then be able to calculate how much remains unpaid for the goods and so how much of the output tax previously paid can be reclaimed as bad debt relief.
The new rules will be contained in regulation 170A of the VAT Regulations 1995 (SI 1995/2518) (as amended) which, in addition to the existing rule, now contains another method of calculation.
Previously, the legislation used a 'straight-line' methodology. The new legislation will, for the first time, reflect existing commercial practice. Thus, for suppliers, the numbers they feed into the calculation will be based upon whatever commercial method they use, for example an actuarial method or the 'Rule of 78'. The ultimate purpose of the calculation is to arrive at the amount outstanding in respect of the goods element, which is used for calculating the amount of bad debt relief.
These provisions apply only to situations where, upon default, customers still owe money. If a customer invokes a right, for example under consumer credit law, to end the agreement early (so-called 'voluntary terminations'), money will not normally be owed and bad debt relief should not apply.
When allocating payments made by defaulting customers between capital and interest, the existing calculation at paragraph 5 of regulation 170A must be used.
For the transitional period between 1 September 2006 and 1 September 2007, suppliers may choose between either the existing method (paragraph 5 of regulation 170A), or the new method (article 6 of regulation 170A).
Suppliers may wish to calculate claims using the old method initially and then re-compute the claim using the new method, adjusting the difference. This is subject to the normal capping rules.
With regard to bad debt relief claims for supplies made on or after 1 September 2007, when allocating payments made by defaulting customers between capital and interest, the new method of calculation at paragraph 6 of regulation 170A must be used.
If a supplier receives payments after the termination of a credit agreement, these should be allocated between the goods and credit according to the proportion of the balances due at the time payment is made. Any bad debt relief claim previously made will need to be checked, since the amount outstanding in respect of the goods will have changed.
If a supplier reduces his selling price after receiving a bad debt relief refund in relation to that supply, then he must repay the VAT element of the price reduction to HMRC.
HMRC Brief 14/07, 13 February 2007
