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Budget 2006 VAT changes for small businesses

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Registration Limit

The registration limit has been increased to £61,000, and the deregistration limit to £59,000. Although the Chancellor indicates that so many businesses can now opt out of the VAT ‘net,’ most prefer to stay VAT registered. So much so that some 20% of all registrations trade below the current threshold.

Fuel Scale Charges

These change from the first VAT Return beginning on or after 1 May 2006, and represent an increase of around 10%. The charge for a petrol car starts at £91.00 per month gross, or £13.55 VAT. This reflects a significant amount of private motoring, and will be potentially costly for many businesses. It is worth looking at the alternatives to using the petrol scale charge – keep mileage records; or choose not to claim any input tax.

‘Reverse’ charge for goods at risk from MITC fraud

HMRC have long struggled to restrict the impact of missing trader Intra-Community (MITC) fraud. After the defeat in the European Court in the Bond House case, existing legislation was ineffective. The new rules will affect only specified goods, ie: mobile telephones, computer chips, where the value of the supplies made to an individual customer exceeds £1,000. This will mean genuine retail purchases will be excluded from the rules.

The new s55A is blatantly called “Customers to account for tax on supplies of goods of a kind used in missing trader intra-community fraud.”

One of the problems with legislation aimed at fraudsters is that it can also affect genuine businesses. If you are involved in the wholesale of computer chips or mobile telephones, then you will need to act smartly to alter your accounting procedures.

Treatment of credit vouchers

Further changes are being made to the VAT treatment of vouchers, such that, where any goods or services are vatable, the vouchers will attract VAT. The overall effect of the various changes will prevent retailers (and companies dealing in vouchers) from reducing their VAT liability. Telephone cards are amongst those vouchers targeted.

Partial Exemption

Where a Client changes to a Special Method, he will have to make a clear statement that to the best of his knowledge and belief it produces a fair and reasonable recovery of VAT. This will mean that, if HMRC take a different view, they will be able to set aside the method, and recalculated past Returns.

Annual Accounting Scheme

The take up of this scheme has been poor. The turnover limit has been increased to £1.35million. The scheme, for which apparently 1 million VAT registered businesses are now eligible, provides for VAT to be paid in nine monthly instalments, followed by a balancing payment, each year. HMRC are clearly seeking to improve the take up of the scheme.

For some businesses, the Annual Accounting scheme will be worth considering. For example, if your business is seasonal, you may wish to time your Annual Accounting year to end shortly before your busy period.

Land & Property – Rewrite of Sch 10, etc.

Land and property have become arguably the most complex areas of VAT. Sch 10 of the VAT Act 1994 is the main section dealing with the option to tax. HMRC have been consulting over its contents and its complexity. The draft version I have seen is certainly an improvement on the original!

• The rewrite includes some genuine changes. Most significant is the provision for belated notification of the option. This follows a concession, which has been in place for several months already.

• To balance the concession, HMRC will have the power to refuse permission to opt if they consider there would not be a fair and reasonable attribution of input tax.

• The new rules provide a ‘purported’ option, which covers those situations where a taxpayer has charged VAT on rent without having made a formal option. Subject to HMRC approval, this will be able to be treated as a valid option.

• The new rules provide more explicitly for the option to tax to be disapplied where the purchase is for a D-I-Y dwelling.

There has also been talk of broader changes, possibly in HMRC practice, rather than in law, for the benefit of owners of large land and property portfolios. There will be such concepts as ‘global’ options and ‘universal’ options. These will mean that a single notification can be made to HMRC, rather than separate notifications for each property.

Where a trader wishes a revoke an option, the time limit is to be increased from the existing 3 months.

The VAT 1614 form, by which an option is notified, has also been changed.

Article kindly written for Bytestart by Les Howard (VAT Consultant).
www.vatproblem.com

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Posted May 8, 2006