Emergency Budget 2010 Highlights
VAT and other indirect taxes and duties
Rate
The standard rate of VAT is to be increased to 20 per cent with effect from 4 January 2011. The reduced rate of VAT remains unchanged at five per cent as does the VAT registration threshold. There will also be no change to the scope of the zero rate.
The threshold for joining the VAT Flat Rate Scheme remains the same but the flat rate percentages that are applied to various categories of business will be increased, also with effect from 4 January 2011.
As with the previous increase in the standard rate of VAT (which followed the temporary reduction to 15 per cent), specific anti-forestalling legislation will be introduced. Subject to certain conditions, this legislation will impose a supplementary charge of 2.5 per cent on 4 January 2011 where the recipient of a supply is not able to recover its VAT in full.
The supplementary charge will apply if any one of the conditions below applies:
- The customer and the supplier are connected.
- The value of the supply is in excess of £100,000.
- The supplier, or somebody connected with the supplier, funds any prepayment for the supply.
- A VAT invoice is issued for the supply and payment of that invoice is not required within six months.
The supplementary charge will not apply if the prepayment or invoicing in advance is normal commercial practice for a business. A similar supplementary charge will also apply to rights and options.
How this affects you
The announcement of the increase to the standard rate of VAT was widely expected given the amount of revenue (£13bn per year) it will raise - and at relatively low cost (to the taxman). The only good news for consumers was that VAT is not to be extended to any of the goods or services that are currently zero-rated or exempt from VAT. Whether the increase will result in any short term increase in consumer spending remains to be seen. Business will have to deal with another rate change but the timing - 4 January rather than 1 January – recognises to a small extent the difficulty some businesses faced last time round. The specific rules that apply when there is a change of VAT rate should be more familiar to businesses, as a result of the two recent rate changes, but is still likely to lead to some confusion. For businesses such as banks and insurers, the VAT increase will increase their cost base. For the public sector (notably education and health) and the voluntary sector, the increase amounts to a cut in their spending budgets.
Accounting for private usage
Special VAT rules, known as the Lennartz principle (following a case by that name in the European Court) are to be abolished. These rules allowed a person (whether natural or legal) to recover in full the VAT on the purchase of an asset which was used for both business and private (or non-business) use. The VAT on the private use was then accounted for by the person paying VAT on the value of such use in each subsequent VAT accounting period. The change will have effect from 1 January 2011, but anyone that is already making the adjustments for private use will have to continue with these adjustments.
Legislation will be introduced with effect from 1 January 2011 to block the recovery of VAT on any private use of certain assets.
How this affects you
This is yet another change which had been trailed in advance. It will bring to an end what was essentially a cash flow advantage where VAT could be recovered on an asset used for both business and private or non-business purposes.
New penalties for late filing and late payment of VAT and other duties
A new penalty regime is to be introduced for the late filing and the late payment of:
- VAT and insurance premium tax.
- Aggregates levy, climate change levy and landfill tax.
- Other duties.
The new provisions will be brought into effect by Treasury Orders, which will specify the dates from which they have effect. This measure completes the reform of the penalty regime for late filing of tax returns and late payment of tax.
For quarterly returns the late filing penalties will range between £100 and £400, depending on the number of ‘failures’. In relation to monthly returns, the £100 penalty will be increased to £200 following the first six failures. If there is a prolonged failure a five per cent penalty is charged both six and 12 months after the date of the failure. If the delay is deliberate, the penalty can be a maximum of 100 per cent of the tax due.
The late payment penalties will be a percentage of the tax or duty paid late. The percentage will increase based on the number of times tax or duty is paid late during a tax year and the length of time that the tax or duty remains outstanding.
How this affects you
HMRC is keen to encourage people to file returns and pay on time or be penalised for non compliance. There is now one regime that will apply to all taxes and excise duties.
People who enter into time to pay arrangements will be able to ask for late payment penalties to be suspended. There is a right to appeal against penalty decisions. A ‘reasonable excuse’ for the delay is required for a successful appeal.
Environmental taxes
There has been no further increase in landfill tax announced in this Budget. The Government has committed to make publicly available the criteria that are used to determine which products should qualify for the lower rate of Landfill tax. The Treasury will, in future, be required to take account of these criteria when deciding if a product should qualify for the lower rate of landfill tax.
The current scheme that exists in Northern Ireland, whereby producers that meet certain conditions are able to claim an 80 per cent credit of Aggregates Levy will be extended for a further 10 years.
Insurance premium tax (IPT) - increase in the standard rate and higher rate
Measures were announced to increase the standard rate of insurance premium tax from five per cent to six per cent and to increase the higher rate of IPT from 17.5 per cent to 20 per cent (in line with the increase in the standard rate of VAT).
The standard rate of IPT applies to most general insurance (including property, motor and medical insurance) but does not apply to life assurance and other long term insurance products which are exempt from IPT. The higher rate IPT applies to travel insurance and certain other insurance products (such as extended warranties) sold alongside motor vehicles and some consumer goods.
The increased rates will apply for premiums received or written by an insurer from 4 January 2011.
Excise issues
The next Finance Act will modernise HMRC’s powers in respect of the gathering of information and the making of assessments for excise duties. This will cover duties on alcohol, tobacco, energy products, gambling and air passenger duty.
The inspection powers will be modernised and the record keeping requirements will be aligned with requirements for other taxes. A new power will allow HMRC to obtain information from certain third parties but the use of this procedure will need to be pre-authorised by the Tax Tribunal. The time limits for raising excise duty assessment will be increased from three years to four years and will be similar to the time limits that apply to VAT.
How this affects you
HMRC consulted widely with businesses before making these changes and these changes will mean that the inspection powers and time limits for assessments are similar across all the indirect taxes. It is good news that the new inspection powers specifically prohibit without a warrant, the inspection of a property that is somebody’s home.
Changes to the zero-rating for aircraft
In a change which was previously announced, the zero-rating that applies to supplies of aircraft will be amended with effect from 1 January 2011, so that it reflects more closely the provision in the EU Principal VAT Directive. From that date zero-rating will only apply to “aircraft operated for reward primarily on international routes”.
How this affects you
This change was made necessary as the UK legislation was out of line with the requirements of the EU VAT Directive. It will mean that many more businesses which either lease or purchase aircraft will now incur VAT on these supplies; some businesses will be able to recover this VAT but for other businesses it will represent a real cost.
Gas/Electricity
The specific rules that determine where VAT is accounted for on supplies of gas and electricity will be extended to cover supplies in all categories of natural gas pipeline and will also be extended to include supplies of heat and cooling supplied via a network. This change will be included in the next Finance Bill to be published later in the year and will have effect from January 2011.
How this affects you
This is a technical change that will not affect many businesses and overall should not result in additional VAT being paid.
Landline Duty
The Landline Duty that was proposed in the 2009 Pre-Budget Report will not be introduced.