'Place of supply' rules to change

From 1 January 2010, new 'place of supply' rules will apply to business-to-business transactions. This new 'VAT package' is likely to have a significant impact on VAT recovery and reporting requirements for all businesses in the EU.

Current rules

At present, the default place of supply of services is where the supplier is situated. However, many services fall within the exceptions, which include:

  • supplies of consultancy, accountancy, legal, financial and advertising services (treated as supplied where the recipient of the service is situated)
  • supplies of land (treated as supplied where the land is located)
  • exhibition, cultural and transport services (generally supplied where they are physically carried out).

New rules

From 1 January 2010, the default place of supply of services will be where the customer is located. UK VAT registered businesses which receive services from outside the UK will be required to account for VAT under the reverse charge rules; for unregistered businesses, this may form part of their taxable supplies for VAT registration purposes. Potentially, all businesses will be affected by these new rules and arrangements; plans should be put in place now, as it could involve changes to the way in which VAT is recorded and accounted for.

Implications of the new rules

  • Suppliers will need to change their invoicing procedures.
  • There will be new reporting requirements, including a European Commission (EC) Sales List for services supplied to other EU member countries. This is in addition to the existing EC Sales Lists for goods.
  • Monthly electronic reporting may be required for VAT reporting.

Partially exempt businesses, which have outsourced administrative operations overseas, should review the VAT cost and contract terms of their arrangements to identify whether they will still be VAT efficient.

What next?

To discuss how you can prepare your business for the changes, please speak to your usual Smith & Williamson contact.

Applying the zero rating provisions to residential developments

A recent Tribunal case considered whether the conversion of roof space in an existing block of flats to new dwellings constituted a zero-rated supply, enabling the company to register for VAT.

The company argued that it was converting a non-residential part of a building into new dwellings. It applied for VAT registration on the basis that it would be making zero-rated supplies of the first grants of a major interest in the new dwellings. It owned the freehold of the existing block of flats and the leaseholders had no right of access to the roof space.

HM Revenue & Customs (HMRC) rejected the application on the grounds that the company would only be making exempt supplies. It argued that zero rating could not apply as it would be artificial to separate the roof space from the rest of the building, thus the roof space could not be considered a non-residential part of the building.

The Tribunal agreed with the company, and held that the new dwellings in the roof space would qualify for zero rating, and that HMRC should have allowed the company to register for VAT. However, the Tribunal made it clear that this would not apply to the conversion of roof space in a single dwelling house.

What next?

This case highlights the difficulties in applying the zero rating provisions to residential developments and the advantage of planning for VAT from the outset. If you are involved in any residential developments, it may be worth discussing the arrangements with your usual Smith & Williamson contact to ensure VAT planning has been carried out correctly.

[Merlewood Estates Ltd (VTD 20810)]

Extension of VAT exemption to special investment funds – update

In the September edition of VAT Focus, we reported on the changes to the legislation for special investment funds, which came into force on 1 October 2008. HMRC has now issued guidance on some of the practical aspects of applying this exemption.

Key points

HMRC has acknowledged that sub-funds listed on the Financial Services Authority Register do not necessarily correspond to sub-funds that are actually marketed in the UK. It has provided a list of other factors (such as 'distributor status') which should be considered when deciding whether the sub-fund is marketed in the UK, and whether, therefore, the management of that sub-fund falls within the exemption.

There is now a de minimis provision which allows for a fund or sub-fund to fall outside of the exemption, if it is not 'for the time being' marketed to UK investors, and either has never been marketed in the UK, or less than 5% of its shares or units are held by UK investors (or on behalf of UK investors).

What next?

Investment fund managers should review whether funds that are expected to qualify as special investment funds fall within the de minimis provision, or are not actually marketed in the UK. If you have any queries in relation to this exemption, please speak to your usual Smith & Williamson contact.

[Revenue and Customs Brief 48/08]

Can anti-avoidance legislation be used to gain an advantage?

HMRC issued an assessment for £875,000 to a company which did not account for VAT on the transfer of business assets (storage units) to another company. The transfer did not qualify as a transfer of going concern (TOGC) for VAT purposes and, as the storage units were opted to tax, the sale was a taxable supply.

The recipient company did not plan to opt to tax the storage units, and intended to make exempt supplies of the leasing of the storage units. As a result, the transfer could not constitute a TOGC. Also, the company did not wish to incur VAT on the purchase of the storage units as this would be irrecoverable, and tried to take advantage of anti-avoidance provisions in the option to tax legislation.

The company sought to rely on a special provision whereby the option to tax is disapplied if the vendor of the opted land or building sells a capital item to a connected person, or to a person providing financing for the development of the land or buildings, and the purchaser then uses the land or buildings for exempt use.

The recipient company funded the refurbishment of the storage units while they were owned by the vendor company, with a view to triggering the anti-avoidance provisions, so that the option would be disapplied.

The Tribunal held that the option should not be disapplied. The refurbishment cost did not constitute a capital item, as the sole purpose of the expenditure was to sell the storage units. Therefore, the vendor company did not incur the cost in the course of business.

What next?

This case highlights the complexities of the anti-avoidance legislation. Businesses should ensure they review all relevant conditions and rules when considering transactions involving an option to tax. If your business is unsure of the anti-avoidance provisions and how they apply, please speak to your usual Smith & Williamson contact.

[Shurgard Storage Centres UK Limited (VTD 20797)]

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.