FA 2011 analysis: VAT

After the excitement of dealing with four different VAT rates in less than three years, it is not surprising that there are few VAT changes in this year’s Finance Act. Apart from the usual incremental increases (eg, to the VAT registration threshold) this year’s changes are largely confined to a few niche areas. However, as always, it’s necessary to determine which situations these will affect and how.

Business samples (FA 2011 s 74)

This reflects the result of the Judgment of the European Court of Justice (ECJ) in the EMI Group Ltd case [2010] STC 2609 concerning entitlement to give away samples of goods VAT free.

Under the previous rules, where a number of identical samples were given to the same person, only the first sample given was relieved from a liability to output VAT. Therefore, if 100 samples of a product were given to the same ‘person’, 99 of those samples could be subject to an output VAT charge. HMRC often interpreted ‘same person’ to mean the employer, not the employee, thereby denying the relief when samples were given to more than one employee of the same company.

In the EMI case, the ECJ ruled that there should be no hard and fast limit on the number of samples that can be given away VAT free. Instead they can be given away in any quantity necessary to achieve their purpose as a sample. The ECJ also concluded that a ‘person’, for the purpose of this provision, is an individual and not the organisation he or she works for. With effect from Royal Assent on 19 July 2011, VATA 1994 Sch 4 has been amended to remove the restrictions previously imposed. Businesses that have previously accounted for VAT on samples given away should submit a repayment claim to HMRC if they have not already done so.

Zero-rating: splitting of supplies (FA 2011 s 75)

In perhaps the most controversial of the VAT changes, HMRC have sought to legislate to prevent the type of planning endorsed by the Court of Appeal in the Telewest Communications plc case [2005] STC 481. In that case, Telewest set up a subsidiary company, outside its VAT group, to provide the Cable Guide magazine, which formed part of the overall subscription for its cable television services. The Court agreed with Telewest that, while the television services remained standard rated, the magazine was separately supplied by the subsidiary and so was properly zero-rated.

Section 75 denies the zero-rating of printed matter in circumstances where:

• the printed matter is ‘connected with’ a supply of services; and
• the supply of services is made by a different supplier to the printed matter.

For these purposes, ‘connected with’ means:

• had the two supplies been made by a single supplier, they would have been treated as a single supply of services; and
• that single supply would have been taxable at a positive rate, or be exempt from VAT.

It does not apply where the printed matter is connected with a supply of goods. The new provision is effective from Royal Assent on 19 July 2011.

In response to concerns over the scope of this measure, HMRC have published their interpretation of the legislation, together with a number of illustrative examples. The key issue is whether the two elements would together represent a single supply of services, and readers will be well aware of the difficulties this question brings. Suppliers of printed matter will need to consider whether any of their products could be caught by these provisions.

Academies (FA 2011 s 76)

FA 2011 introduces new VATA 1994 s 33B; a VAT refund scheme for academy schools. This enables the academy to recover the VAT it incurs on expenditure which supports its non-business activities (principally the provision of free education). This refund scheme will replace the VAT grant previously given to academies.

If the academy is registered for VAT, the amount claimed under s 33B can be included with the input tax on its VAT return. If the academy is not VAT registered, a separate claim form must be submitted.

Academies may reclaim VAT under the new rules from 1 April 2011 onwards.
HMRC have recently published VAT Information Sheet 9/2011, which provides significantly more detail on this issue.

Relief from VAT on imported goods of low value (FA 2011 s 77)

Finally, readers who buy their CDs, DVDs, contact lenses and similar items on the internet, together with suppliers of such items, may have breathed a sign of relief when it was announced that the Low Value Consignment Relief (LVCR) threshold is to be reduced by just £3; from £18 to £15, with effect from 1 November 2011.

Goods imported from outside the EU are free of VAT if the package is below the LVCR threshold. Not only has this helped fuel internet shopping, it has also encouraged UK suppliers to set up operations in places outside the EU (such as Jersey or Guernsey) to sell products to UK consumers VAT free.

However, HMRC are currently in talks with the European Commission to discuss the possibility of further reductions, so while your copy of Now That’s What I Call Music! 79 may be VAT free, you might end up paying VAT well before the series reaches 100!

Richard Wild, Director, PKF