If you would like to discuss any of the items featured in this months VAT News please contact Scott Craig, VAT Partner.

VAT News August

• VAT New Rules for Emission Allowances
• VAT Savings, Benefits and Efficiencies

VAT New Rules for Emission Allowances

With effect from 31 July 2009, the Government has implemented rules to zero-rate the supply of emissions allowances (also known as carbon credits). This is a temporary measure until legislation is implemented across the EU Member States. To view as a pdf click here

Background

The reason for the change in the law is the increasing threat of VAT fraud in relation to the trade of the credits. This area is of particular concern to the UK government, as supplies made between UK businesses were standard-rated, but were VAT free if purchased by a UK company from within the EU.

This leaves the UK Government vulnerable to major VAT losses through Missing Trader Intra Community (MTIC) VAT fraud. An MTIC fraud works where a fraudulent UK company registers for VAT and then sources VAT free items from other EU Member States, which is in line with the rules. It then makes supplies to other UK VAT registered traders (several of whom may work in collusion with the fraudulent trader) and charge VAT. However, rather than paying the VAT collected over to HMRC the trader disappears, keeping all of the VAT collected.

The ability to trade freely in emissions allowances is an important feature of the EU Emissions Trading Scheme. However, the existence of a strong secondary cross-border market in emissions allowances generates very high volume, value and speed of trade. This, combined with the fact that emission allowances are only surrendered once a year, provides fraudsters with multiple opportunities to steal VAT following cross-border acquisitions. As the trade of credits can be a very speedy process for very high values the opportunity to defraud VAT monies is highly increased.

New rules and Consequences

Any transaction of EU emissions allowances and transferable units issued (in line with the Kyoto Protocol) will be affected. This covers over the counter spot trades, transactions involving future delivery and options. Cross border transactions are not affected by the new rules.

It is important that the tax point issues arising from these new rules is appreciated. Since the tax point is created by the earlier of the transfer of title or payment, any VAT on invoices that are dated after 31 July 2009 will be blocked from recovery, as the amount purported to be VAT on the invoices is input tax since the supply should actually be zero-rated.

HMRC accept that there may be some teething problems as the new rules were announced and implemented suddenly without due notice. As such it will use discretion where VAT has been charged or reclaimed after 31 July 2009. HMRC have indicated that due to the scale of any possible fraud attempts businesses should endeavour to implement the new rules as a matter of urgency.
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VAT Savings, Benefits and Efficiencies

UK VAT rules provide a limited number of benefits and savings to public sector and not-for profit-organisations. These organisations would undoubtedly incur millions of pounds of additional irrecoverable costs if these benefits were not in place. The benefits are generally applicable to free of charge or public services and commonly include the ability to recover additional VAT, removing VAT from property transactions, zero-rating new buildings, advertising services, and other goods and services as well as the reduced rate of VAT on fuel.

To view as a pdf click here

The way that VAT impacts on public bodies and not-for-profit organisations is currently under review and will be addressed by the EC within the next year. In our experience there are a number of areas and actions that can (and should) be considered by public sector and not-for-profit organisations that could reduce or remove the irrecoverable cost of VAT.

Historically many public sector organisations have claimed that identifying VAT savings is not cost effective as any shortfall is ultimately funded by government. In the current climate all organisations have a responsibility to ensure that systems and procedures are efficient and that public sector funding is being used to maximum benefit. In some cases grant funding cuts could be met by improving the VAT efficiency of an organisation. In practice we have found savings in the following areas:

The way that VAT impacts on public bodies and not-for-profit organisations is currently under review and will be addressed by the EC within the next year.

The VAT status of organisations: Some organisations already benefit from a special VAT status that allows them to recover additional VAT.  We believe that additional bodies in Scotland should benefit from the same VAT status as their equivalents in England and Wales;

Improved coordination and cooperation between public bodies and not for profit organisations can result in VAT savings or benefits:  The wording of funding agreements can make a substantial difference to the VAT treatment and cost associated with certain projects.  It is important that all parties understand their VAT positions and the potential costs incurred from proposed arrangements.  In most cases, steps can be taken to minimise unnecessary or adverse VAT costs;

Maximising the application of zero and reduced rate VAT on construction projects and property transactions:  Obtaining specialised advice at an early stage is vital and can ensure that little or no VAT is added to the cost of capital projects.  If this position has been overlooked retrospective action can be taken for up to three years.  As a general rule of thumb zero-rating is available for new buildings and no VAT should be incurred on the rental of property that is used for non-business or public activities;

Removing the cost of VAT from expenditure: Maximises zero and reduced rating on key goods and services such as fuel and power, advertising drugs and medicine and equipment for disabled people;

Improving the recovery of VAT: Regular reviews of partial exemption and non-business calculations can result in improved recoveries or reduced costs;

Staff knowledge and awareness:  If key staff are aware of fundamental VAT principles and benefits, unnecessary costs can be identified and removed.

Our specialist VAT team have assisted a large number of public sector and not-for-profit
organisations to identify VAT savings benefits and efficiencies.  We would be happy to
discuss the points noted above with any interested parties. 

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