Budget Alert 2012Indirect tax
Shown: Percentage of respondents
Base: all respondents (669)
This section looks at the main changes to indirect tax law announced in the Chancellor's Budget.
- VAT: Changes to registration and deregistration thresholds
The VAT registration and deregistration thresholds for UK businesses have been increased.
From 1 April 2012, the VAT registration and deregistration thresholds will increase by £4,000 to £77,000 and £75,000 respectively.
As previously announced, with effect from 1 December 2012, the VAT registration threshold will be removed for businesses not established in the UK (i.e. a nil registration threshold will apply). Also, an online system for VAT registration, deregistration and changes to business details will be introduced with effect from 31 October 2012.
The £4,000 increase in the thresholds for UK businesses is larger than previous years allowing further small businesses to escape the VAT net. The change for overseas businesses brings the UK into line with other EU countries.
- VAT: Fuel scale charges
The fuel scale charges for private use of business fuel will increase in line with current fuel prices for VAT accounting periods beginning on or after 1 May 2012. Subject to consultation, a long standing extra statutory concession (ESC) relating to fuel scale charges will be brought into UK law.
UK law requires a scale charge to be paid when fuel purchased by a business is used for private journeys. The ESC allows businesses who do not reclaim VAT on the purchase of fuel not to pay the scale charge.
It appears that the Government may seek to restrict the application of the ESC to fully taxable businesses when the ESC is introduced into UK law.
- VAT: Borderline anomalies – food and drink
The scope of the zero rate for food is to be redefined to remove anomalies and complexity in three specific areas – hot take-away food, food consumed on shared premises, and nutrition drinks.
The measure will seek to ensure that all food that is above ambient temperature when provided to the customer will be standard-rated, with the exception of freshly baked bread.
In addition, the borderline between on-premises and off-premises consumption will be changed: food supplied for consumption in all areas set aside for the purpose, including premises shared with other retailers, will be treated as a supply in the course of catering and standard-rated. In consequence, food consumed on shared premises such as food courts in shopping centres and at tables and chairs on pavements will all be standard-rated.
Some sports drinks are currently zero-rated because of their nutritional content. This measure is intended to tax all sports drinks at the standard rate whether or not they are consumed for nutritional purposes.
The tax base is being broadened as a result of these measures and, under EU law, there can be no reversal. Draft legislation is the subject of consultation with a deadline for responses of 4 May 2012. It remains to be seen whether the measures will result in fewer anomalies or simply substitute one set for another.
- VAT: Borderline anomalies – land and property
It is proposed that some exemptions and zero rates will be removed with effect from 1 October 2012. Most of the relevant supplies will become standard-rated, whilst the first grant of a major interest in a substantially reconstructed listed building will become exempt in certain cases.
The changes affect the exemption applying to self storage, the exemption which is occasionally claimed in relation to chair rental by hairdressing salons, and the zero rate which applies to sales of certain caravans for holiday use. All of these supplies will become standard-rated. In addition, approved alterations to certain listed residential or charitable buildings will become standard-rated and the first grant of a major interest in a substantially reconstructed such building will become exempt where it is not reduced to a shell.
The introduction of mandatory standard-rating for self storage raises issues, firstly because the definition is not clear and secondly because there is a proposal to retain exemption for supplies between connected businesses for anti-avoidance reasons. It is hoped that these issues can be resolved before the effective date of 1 October 2012. HMRC has recently lost twice in the Tribunal on the application of this exemption, and clearly considers that the imposition of VAT on self storage is an important issue. Hence, we have a proposal to change the law coupled with the use of anti-forestalling provisions.
Exemption for chair rental in hairdressing salons has been the subject of litigation over many years, and this measure should put the position beyond doubt.
The justification for changing the definition of a zero-rated caravan is that zero-rating currently applies to some holiday caravans. The change (to coincide with British Standard 3632) aims to restrict the zero rate to residential caravans as originally intended.
Approved alterations to qualifying listed buildings are currently zero-rated whilst repairs and maintenance are standard-rated, giving a ‘perverse incentive’ (as HMRC puts it) to alter such buildings rather than repair or maintain them. Further, zero-rating currently applies to the first grant of a major interest in a listed building where at least 60% of the works qualify as approved alterations. Such a grant will become exempt so that the VAT on related works will not be recoverable. The surprise here is that a transitional provision has been allowed where there is a signed written contract already in place before Budget Day (or in the case of substantial reconstructions where 10% of the work was completed by Budget Day). Unfortunately the transitional period for works to be done only runs to 20 March 2013. Planning may be needed here – for example to make a major interest grant before that date – but there is also intended to be an anti-forestalling rule to prevent works actually performed from 1 October 2012 from benefiting from the zero rate.
- VAT: Cost sharing exemption
This exemption is mandatory under EU law, and, therefore, needs to be enacted in UK law. The Government has reconfirmed that it will be implemented by Finance Bill 2012 in the form of the draft legislation previously released.
The exemption applies to businesses and organisations using shared services for the purposes of their exempt or non-business activities who form groups to achieve economies of scale. The intention is to remove the added VAT cost of doing so. HMRC stated in November 2011 following the Autumn Statement that the exemption will have retrospective effect, subject to all the conditions having been met.
The most interesting aspect is whether arrangements may have been set up in the past which were in line with the conditions for achieving the new exemption. One important area where the exemption may apply is for certain recipients of SWIFT payment services, as SWIFT appears to meet the requirements of a cost sharing group. Banks which are members of SWIFT may be able to reclaim VAT accounted for on the receipt of such services over the last four years.
The Government has indicated that it will issue regulations setting out further conditions. To the extent that these conditions provide restrictions other than those set out in EU VAT law (such as requiring the existence of a separate cost sharing entity rather than a contractual arrangement), there is a question as to whether the conditions can be applied retrospectively.
- VAT: Low value consignment relief (LVCR)
From 1 April 2012, LVCR will no longer apply to goods imported into the UK from the Channel Islands.
As previously announced, from 1 April 2012, the LVCR threshold, below which goods imported into the UK from outside the EU are relieved of VAT, will no longer apply to goods sent from the Channel Islands.
An application by Jersey and Guernsey for judicial review of the Government's decision to remove LVCR for goods imported from the Channel Islands was recently refused. The High Court ruled that ending LVCR for just the Channel Islands and not other non-EU countries was not discriminatory. LVCR will, therefore, be removed from 1 April 2012 as previously announced. LVCR (with a £15 threshold) will continue to apply to commercial supplies from other non-EU jurisdictions.
- VAT: Charitable buildings
The supply and installation of energy-saving materials in relation to charitable buildings will no longer fall within the reduced rate of VAT. Appropriate legislation will be introduced in Finance Bill 2013.
Currently, the reduced rate of VAT applies to the supply and installation of specific energy-saving materials in buildings which are either residential accommodation or used solely for charitable purposes. This measure removes the application of the reduced rate for buildings used for charitable purposes but will continue to apply to residential accommodation.
This measure is somewhat surprising given the Government’s ongoing green agenda and recent pressure to widen the scope of the reduced rate of VAT to all energy saving materials supplied and installed in residential and charitable buildings.
- VAT: Other Budget announcements
The following measures have been previously announced:
- Simplified VAT invoicing measures will be introduced with effect from 1 January 2013 to ensure compliance with EU law. The new measures are to bring the UK into line with the EU Invoicing Directive which further harmonises and simplifies VAT invoicing rules across all Member States.
- The concession relating to the value of certain services bought-in by an overseas member of a UK VAT group, and supplied to another member of that VAT group, will be given statutory effect in Finance Bill 2012. The concession will continue to apply until the new law is enacted.
- The temporary measures relating to the VAT-free treatment of freight transport and related services that take place entirely outside of the EU will be formalised.
- A voluntary scheme for the reporting of adapted motor vehicles and boats will be introduced for car and boat dealerships to enable HMRC to evaluate the current use of the VAT zero-rating.
- The online notification scheme for road vehicles imported into the UK aimed at tackling VAT fraud will be introduced in Finance Bill 2012.
The following additional announcements were also made:
- Finance Bill 2013 will introduce new definitions to ensure that the benefits currently enjoyed by Primary Care Trusts and Strategic Health Authorities are mirrored for Commissioning Boards and Clinical Commissioning Groups following the changes under the Health and Social Care Bill.
- The education VAT exemption will be reviewed to ensure equitable treatment for commercial universities providing degree level education.
- The VAT rate for the provision of small cable based transport will be reduced from 20% to 5% where the vehicle is designed to carry fewer than 10 people. A period of consultation will be undertaken during 2012 with the measure being reviewed after a three-year period.
- From 1 April 2013, zero-rating and reduced rate VAT rules will be amended to ensure that Universal Credit claimants receive the same VAT relief as under previous benefits.
- Gambling duty changes
The Government has announced the rates of machine games duty (MGD), which will replace amusement machine licence duty (AMLD). In addition, dutiable machines become VAT exempt. Other future duty changes were also flagged.
As previously announced, MGD will replace the current AMLD regime with effect from 1 February 2013. MGD will be payable on net takings from dutiable machine games. The standard rate of MGD will be 20%. For machines with maximum stakes of 10p and maximum cash prizes of £8, a lower rate of 5% will apply. At the same time, dutiable machines will become exempt from VAT.
HMRC anticipates that, as a result of the introduction of MGD, the overall tax liability for adult and family entertainment centres, clubs and most pubs will reduce, whilst the liability for casinos, bingo halls and licensed betting offices is expected to increase.
Until MGD is introduced, the rates of AMLD will rise in line with the RPI.
In addition, the Government will consult on the introduction of a remote gaming taxation regime based on the place of consumption.
There is also expected to be a relaxation of bingo duty arrangements for combined bingo involving non-UK participants and double taxation relief for gambling duties.
The introduction of MGD has been designed to be revenue-neutral across machine games operators. However, the impact will vary from business to business depending on the profitability of the machines and the effect of the VAT exemption. Some businesses could be adversely impacted by having to repay VAT on certain capital projects under the capital goods scheme.
Certain businesses, such as pubs and clubs, which may currently recover VAT in full, could suffer a partial block in their VAT recovery as a result of the VAT exemption. This will create both a VAT cost and an administrative cost in terms of calculating the VAT recovery, which can be complex.
- Air passenger duty (APD)
The introduction of APD for business jets will be implemented as previously planned with effect from 1 April 2013. In addition, despite a campaign by the UK aviation sector, APD rates will increase for each of the bands by circa 8% for flights departing on or after 1 April 2012.
The APD measures for business jets have been widely anticipated and discussed since its introduction in the 2011 Budget. Draft legislation was published by HMRC for consultation on 21 February 2012 to give statutory effect to the proposed changes, which effectively lower the current APD exemption definitions. These changes will take effect for flights departing from UK airports on or after 1 April 2013.
These changes have been widely anticipated following the consultation that was undertaken on the structure of APD and the rate increases over previous years. The changes will have a significant impact on private, corporate and on-demand aviation as well as smaller operators in relation to both compliance and tax costs. This measure is only expected to raise circa £5m in extra revenues per year (commencing in 2013/14) out of total APD revenues which by 2013/14 are expected to be circa £3bn.
- Climate change levy (CCL) – rates
As expected, CCL rates will increase in line with the RPI from 1 April 2013.
- Climate change levy (CCL) – removal of exemption for electricity from CHP stations
The CCL exemption for electricity from combined heat and power (CHP) stations supplied indirectly to business energy consumers will be removed from 1 April 2013.
As announced at Budget 2011, in view of the introduction of the carbon price floor and the expiry of State Aid approval for the CCL CHP indirect supplies exemption, the CCL exemption for electricity from CHP stations supplied indirectly to business energy consumers will be removed from 1 April 2013. It has now been announced that electricity utilities will be able to continue to allocate CHP Levy Exemption Certificates until 31 March 2018 in relation to generation before 1 April 2013 to give them time to use up their stocks. In order to ensure the fair treatment of CHP, fossil fuels used to generate heat in a good quality CHP station will not be liable to the carbon price support rates, subject to State Aid approval.
Electricity utilities will need to account for CCL on relevant supplies once credit balances have been used up or from 1 April 2018, whichever is sooner.
- Climate Change Agreements (CCAs)
As announced in the 2011 Budget, CCAs will be extended to 2023. Also, as announced in the Autumn Statement, the climate change levy discount on electricity for CCA participants available from 1 April 2013 will be increased to 90% as part of a package of measures to support energy-intensive industries exposed to international competition.
- Carbon price floor – 2014/15 rate and related provisions
The Government will set 2014/15 carbon price support rates equivalent to £9.55 per tonne.
Following the announcement of the introduction of a carbon price floor from 1 April 2013, the rate has been set for 2014/15 equivalent to £9.55 per tonne. The carbon price support (CPS) rate will be based on the average carbon content of each fossil fuel and will reflect the difference between the future market price of carbon and the floor as set out in the 2011 Budget.
Additional provisions will be introduced including:
- Amendments to the treatment of solid fuels, including a change to the way the rate for solid fuels is calculated and expressed, and provision that coal slurry will not be taxed
- Fossil fuels used to generate heat in good quality combined heat and power (CHP) plants will not be liable to the carbon price support rates, subject to State aid approval
- Fossil fuels intended for generating non-electricity outputs in a CHP that are not good quality will be liable to the ordinary rates of CCL and fuel duty
- Supplies of fossil fuels to generation stations fitted with carbon capture and storage (CCS) technology will be entitled to a proportionate abated CPS rate of CCL to reflect the percentage of carbon dioxide abated
- The introduction of a generating capacity threshold of two megawatts before which electricity generators will be liable to the carbon price support rates of CCL
- All generators will be required to self-account
The changes have been made in response to industry representations to introduce a level playing field between CHP generation and non-CHP heat generation, as well as minimising the burden on business. CHP plants will benefit from the exemption for input fuels for heat. The self-accounting regime is aimed to fit with existing business practices.
- Carbon Reduction Commitment (CRC) – consultation
The Government will consult on simplifying the CRC Energy Efficiency Scheme to reduce administrative burdens on business with the alternative option of introducing an environmental tax.
The Government has already taken soundings on its plans to simplify the CRC scheme in order to reduce the regulatory and administrative burden on participants. Criticism of the scheme has been widespread with key objections being:
- complexity of the rules
- cost of administering the scheme
- overlap with other policies
- a lack of alignment with existing business processes
The Government appears to have taken this feedback on board. It has now signalled that should it not be possible to deliver very significant administrative savings, it will bring forward proposals in Autumn 2012 to replace CRC revenues with an alternative environmental tax, and will engage with business before then to identify potential options. The proposal does not, however, appear to address another major criticism that recycling of purchased allowances will not be permitted.
- Landfill tax (LFT)
From 1 April 2013, the standard rate of LFT will increase by £8 per tonne to £72 per tonne. The lower rate of LFT will, however, remain frozen at £2.50 per tonne.
The maximum credit that a landfill site operator can claim under the Landfill Communities Fund (LCF) will be amended to 5.6% of its annual LFT liability. This is to ensure that the total value of the LCF remains unchanged at £78.1m.
The Government will introduce retrospective legislation in Finance Bill 2012 to correct a perceived anomaly whereby landfill sites in Scotland have arguably (although not in HMRC’s view) been outside the scope of LFT since 21 March 2000. Legislation will also be introduced to block perceived avoidance regarding the use of connected parties to accelerate the timing of tax relief on site restoration payments.
The increase in the standard rate should not come as a surprise to LFT payers as the persistent increase in LFT rates has been used by the Government as a means to increase the level of recycling and reduce the level of disposal to landfill sites in the UK.
- Aggregates levy
The Government is delaying the planned increase in the aggregates levy rate from £2.00 to £2.10 per tonne until 1 April 2013. This is a further delay of an increase that was originally due to take effect from April 2011 and will relieve some of the pressure on the aggregates industry in Northern Ireland following the suspension of the aggregates levy credit scheme.
- Alcohol and tobacco duties
Alcohol duty rates will increase by 2% above inflation with effect from 26 March 2012. Tobacco duty rates will increase by 5% above inflation from 6pm on 21 March 2012.
The increase in the alcohol duty rates will add 3 pence to the price of a pint of beer, 2 pence to the price of a litre of cider, 11 pence to the price of a bottle of wine, and 41 pence to the price of a bottle of spirits.
Furthermore, a consultation on alcohol anti-fraud measures was announced. This consultation will include the introduction of fiscal marks for beer, supply chain legislation and a licensing scheme for wholesale alcohol dealers.
The increase in the tobacco duty rates will add 37 pence to the price of 20 cigarettes as well as a 25g pouch of hand-rolling tobacco, 20 pence to the price of a 25g pouch of pipe tobacco, and 12 pence to the price of a pack of five small cigars.
In addition, it was announced that the tax treatment of legally available herbal smoking products will be brought in line with the treatment of those containing tobacco.
The 5% tobacco increase is higher than the March 2010 Budget announcement of 2%, but is in line with the published policy to maintain high tobacco duty rates to support health objectives and to contribute to Government revenues and fiscal consolidation.
- Modernising customs and excise legislation
It has been announced that UK customs and excise legislation will be updated in relation to detention and definition of goods and the size of penalties for smuggling on ships.
The provisions for fines on ships used in smuggling are considered outdated in a number of respects and are no longer an effective deterrent. The aim is to replace these provisions with a modern civil penalty regime subject to review and appeal arrangements. In addition, stronger sanctions will be explored for the unauthorised removal of detained goods.
- Vehicle excise duty (VED)
Rates will increase in line with the RPI from 1 April 2012, with the exception of VED rates for Heavy Goods Vehicles (HGV) which will be frozen in 2012/13.
For the future, the following announcements were made:
- tax disc postage costs will be reduced by extending to 14 days the grace period following the payment of tax on the non-display of a tax disc in a vehicle
- the administrative burdens on car leasing businesses will be reduced by extending the date-to-end-month scheme to VED exempt licences
- consideration will be given whether to reform VED over the medium term, and
- a direct debit system could be developed to allow motorists to spread their VED payments.
- Fuel duties
As previously announced, the fuel duty increases that were due to take effect on 1 January 2012 are deferred to 1 August 2012.
On 1 August 2012, fuel duties will increase as follows:
- main road fuels by 3.02 pence per litre
- non-road fuels by the same percentage corresponding to main road fuels
- natural gas by 4.37 pence per kg
- LPG by 5.73 pence per kg
- aviation gasoline by 1.96 pence per litre
- the inflation increase that was originally planned for 1 August 2012 has been cancelled.
With effect from 1 April 2012, the legislation will be amended to clarify that the use of red diesel to propel private pleasure craft is allowed within UK waters. If used outside UK waters, it is subject to the restrictions and prohibitions under the national laws of the relevant European Member State.
<< Previous | Next >>
Find out more
Please call our Budget hotline on
020 7951 5000