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Value Added Tax

Registration and deregistration - increased thresholds

This year the registration and deregistration thresholds have been increased slightly more than usual.

From 1 April 2007, the taxable turnover thresholds have been increased as follows:

  • compulsory VAT registration i.e. if taxable turnover has exceeded the threshold in the last 12 months or is expected to do so in the next 30 days - from £61,000 to £64,000
  • entitlement to deregister i.e. if taxable turnover in the next 12 months is not expected to exceed the threshold - from £59,000 to £62,000
  • registration and deregistration in respect of acquisitions from other EU Member States - from £61,000 to £64,000.
From 1 April 2008 1 April 2007
Standard rate 17.5% 17.5%
Standard rate VAT fraction 7/47 7/47
Reduced rate 5% 5%
Reduced rate VAT fraction 1/21 1/21
Taxable Turnover Limits
Registration - last 12 months or next 30 days over £67,000 £64,000
Deregistration - next 12 months under £65,000 £62,000
Cash accounting scheme - up to £1,350,000 £1,350,000
Optional flat rate scheme - up to £150,000 £150,000
Annual accounting scheme - up to £1,350,000 £1,350,000
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Changes to the method of calculating fuel scale charges

Businesses that reclaim input tax on fuel used for private motoring must pay a set amount of output tax back to HM Revenue and Customs, which is deemed to cover the private element. This is known as the fuel scale charge. Until now, this has been based on the vehicle engine capacity but from accounting periods beginning on or after 1 May 2007, the charge will be based on carbon dioxide (CO2) emissions to align the VAT treatment with that for direct taxation.

A new table has been published for this purpose in which CO2 emission levels are split into bands with intervals of five. Businesses should note the following:

  • Where the figure for a vehicle is not divisible by five, it is rounded down. For example, if the CO2 figure is 173, the scale charge for 170 is applied
  • For bi-fuel vehicles with two emission figures, the lower of the two should be applied.

For older vehicles without an emissions figure, HM Revenue and Customs has prescribed an emissions level based on the engine capacity.

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Transfers of going concerns

From 1 September 2007, the record-keeping requirements for transfers of going concerns will be aligned with other tax and regulatory regimes. From that date, the seller will retain his records except in the rare cases where the buyer keeps the seller's VAT registration number.

When the changes are in place, sellers must and HM Revenue and Customs may make available information that buyers need in order to comply with their VAT obligations.

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Changes to rules for calculating private use of land, buildings and other assets following ECJ judgements

Following the Charles & Charles-Tijmens and Wollny ECJ judgements, changes will be made to the way businesses account for the private use of land, buildings and other assets.

Rather than apportion the input tax up front on an asset which is to be used for business and private purposes, it has been possible to recover all input tax when assets are purchased and then account for output tax as and when they are put to private use under what is called 'Lennartz accounting', although since 2003, HM Revenue and Customs has not allowed UK businesses to use the method for land and buildings. From 1 September 2007, Lennartz accounting will also be available for land and buildings. However, also from that date, the maximum period over which the private use is calculated under Lennartz accounting will be reduced from 20 years to 10 years. HM Revenue and Customs will make regulations for this after a consultation period in the summer.

This measure will also put beyond doubt that a surrender of an interest in land for no consideration will be treated in the same way as the grant of a new interest or the assignment of an existing interest to another person, thus closing an existing loophole. This part of the measure is effective from 21 March 2007.

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Introduction of reduced rate for smoking cessation products

For one year only, to coincide with the ban on smoking in public places in England, the 5% VAT rate will apply to over the counter sales of smoking cessation products such as patches, gums and inhalators. The year is likely to run from 1 July 2007 until 30 June 2008.

The change will apply to all retail sales including those made over the Internet. However, such products supplied on a prescription will continue to be zero-rated.

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Joint and several liability

HM Revenue and Customs can direct that a business is jointly and severally liable for the VAT due on certain goods bought from a VAT registered business if they have reason to believe the buyer knew the VAT would not be paid elsewhere in the commercial chain. The current provisions apply to telephones, computers and relevant parts and accessories.

From 1 May 2007, electronic equipment used for leisure, amusement or entertainment will be included and satellite navigation systems will be classed as computer equipment.

The new measure will also enable Revenue and Customs to extend or otherwise alter the circumstances in which they presume a person has grounds for suspecting VAT will not be paid elsewhere in the chain. This change will apply from later in 2007, after the Finance Bill has been approved by Parliament.

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Further relief for charities changing use of buildings

Under Extra Statutory Concession 3.29, a charity can still obtain zero rating for the construction of new buildings, or work on existing buildings provided that non-qualifying use does not exceed 10%, based on certain measurements i.e. time available, floor space or head-count. However, until now, a taxable self-supply charge has been applied if the qualifying use has fallen below 90% within 10 years of obtaining zero rating.

From 21 March 2007, HM Revenue and Customs will no longer apply the self-supply charge where the change of use was not anticipated when zero rating was obtained, either under the concession or where there was no non-qualifying use from the outset. However, if it appears to HM Revenue and Customs that the change of use was anticipated, they will consider that the zero rate should not have applied in the first place.

Charities that have made change of use adjustments within the last 3 years, whether or not they are or have been VAT registered, may be entitled to a refund.

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Cash accounting scheme

Although not a Budget measure, it is worth reminding businesses that from 1 April 2007, there will be significant increases to the cash accounting scheme thresholds. From that date, the annual turnover threshold below which businesses may start to use the scheme is increased from £660,000 to £1,350,000 and the annual turnover limit above which businesses must leave the scheme is increased from £825,000 to £1,600,000.

The scheme allows suppliers to pay output tax on the date they receive payment from their customers and thus automatically provides relief from VAT on bad debts. However, they can only claim input tax on the date they pay suppliers, rather than on the date of the purchase invoice.

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