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L-day: the VAT perspective

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VAT and value shifting

HMRC had consulted on reforming VATA 1994 s 19(4), on apportioning the consideration received in a single transaction comprising two or more supplies with different liabilities. HMRC wanted to introduce mandatory apportionment methods. HMRC has now responded that it will be keeping this under review. I expect this proposal to die a death. There are bigger fish to fry, evidenced by the fact that HMRC received only seven responses to the consultation. Most of the ‘abuses’ in this area involve cases where HMRC could win on a composite supply argument. Further, where a taxpayer makes substantial separate exempt supplies, this will prejudice its input VAT recovery. If HMRC is really concerned about abuse in this area, extending the notifiable arrangements regime would be a pragmatic way of proceeding. Businesses are rightly concerned about increasing complexity and administrative burdens.

Reform of VAT refunds to the public sector

HMRC quite properly want to reform the law and administration of VAT refunds for government departments, including the NHS. The government set out in 2020 a new proposed full refund method, which would extend VATA 1994 s 41 and permit full refunds of VAT on all goods and services incurred in the course of non-business activities. For too long, we have all struggled to locate old copies of the London Gazette to find details of permitted contracted out services and then twisted the language to fit. Complexity in this area is very inefficient. That said, with distortion of competition with the private sector a real risk, HMRC is prudent to get the reform right and it looks like more time and thought is needed. 

VAT grouping

This was an important call for evidence focused on three important areas of possible reform, namely the establishment provision in the light of Skandia, introducing comprehensive compulsory VAT grouping, and general partners and limited partnerships. As announced on 23 March 2021, HMRC has been convinced by those in favour of maintaining current practices. This is a good example of HMRC stepping away when the rules are broadly working (the option to tax is another case in point), notwithstanding that in some situations grouping may give rise to advantages they don’t like, but fall short of abuse. HMRC is no doubt keenly aware of its existing powers to curb aggressive use of grouping (s 43(2A) combining branches with grouping, the ability to refuse applications for the protection of the revenue (subject to current litigation) and Sch 9A on exit avoidance). HMRC is right to step away and focus on its extensive existing powers.

VAT and the sharing economy

This consultation involves taxing online platforms, used to facilitate supplies of services to UK consumers. HMRC have confirmed that it will continue to engage with the OECD about reform. Online marketplaces, which facilitate sales of goods to UK customers, are now themselves liable for VAT on sales of goods from 1 January 2021, with a parallel regime for goods sold through online marketplaces to EU consumers from 1 July 2021. Digital services tax will tax certain value generated from sites, but taxing overseas services supplied B2C through online marketplaces is an area of possible reform. Marketplaces are an easy target to help in enforcement. I think HMRC will wait until the online marketplace regime for goods has bedded down, and then seek to widen the scope to services 

VAT and making tax digital

HMRC published a report of interviews with 2005 random businesses to discover how MTD was working. HMRC has found that businesses using fully compatible software have the best experience, the highest confidence in the accuracy of their returns and the lowest additional cost, in terms of checking. No surprises there. Businesses using software to retain records have increased in number. The message from HMRC seems to be that using compatible software will produce savings so the quicker a business can move to this, the better. 

Issue: 1542
Categories: In brief