The Budget 2005 - VAT

Turnover limits
The VAT registration turnover limit rises to £60,000 from 1 April 2005. The deregistration limit increases to £58,000. There are no changes to the turnover limits for the cash accounting, annual accounting and flat rate schemes.

Disclosure rules
The disclosure rules are extended to schemes that give a tax advantage that does not appear on a VAT return. For example, the advantage might involve VAT that cannot be deducted because it relates to exempt supplies or non-business activity. Currently, businesses need only disclose use of a scheme when it has made a difference to the figures on their VAT return.

Two new schemes will join the list of specific schemes that businesses must disclose if their turnover is £600,000 or more. One scheme exploits differences between the UK and another EU member state’s treatment of vouchers. The other scheme attempts to remove the effect of an election to waive exemption on supplies of land and property. A new ‘hallmark’ of avoidance is introduced to require a disclosure of schemes that make use of face value vouchers with low redemption rates. The changes will take effect after Royal Assent on dates to be announced.

Partial exemption
Some changes are made to the partial exemption rules from 1 April 2005 to address weaknesses in the calculation methods. In future, approval or direction of a special method will have to be in writing. Customs will be able to override special methods more often. Another change removes the benefit of rounding-up in the standard method for businesses with ‘residual’ input tax of £400,000 a month or more.

Unjust enrichment
Customs will be able to refuse VAT repayment in a wider range of circumstances, where businesses have accounted for VAT incorrectly charged to customers. At present, Customs can refuse a VAT repayment on the grounds of ‘unjust enrichment’ only to the extent that a business has overpaid VAT. The measure extends the defence of unjust enrichment to all claims for refunds of overcharged and over-accounted for VAT, regardless of whether they are in a payment or repayment position on individual VAT returns. The measure will apply to all claims for a credit of VAT made after 22 March 2005.

Place of supply
Some UK businesses registered for VAT have to account for VAT on natural gas and electricity received from suppliers established outside the UK, following changes introduced from 1 January 2005. A new rule effective from 17 March 2005 establishes that the value on which VAT is to be accounted for is the consideration payable to the supplier.

Local authorities
Local authority provision of certain services, such as childcare and welfare, will be reclassified as non-business activities rather than exempt activities for VAT purposes from 1 April 2005. This will remove the present restriction on VAT refunded to local authorities when they provide these services.

Charities and communities
From a date to be announced, the 5% reduced rate of VAT will be extended to certain supplies of advice or information connected with or intended to promote the welfare of elderly or disabled people or children, except where the goods and services are exempt from VAT.

An interim grant scheme to cover VAT costs incurred by charities in the construction, renovation and maintenance of memorials will be introduced while the government negotiates at the European level for a permanent reduced rate.

The government will make special donations equivalent to the VAT collected from fund-raising activities for Tsunami relief, and the VAT collected on the Band Aid single and Live Aid DVD.

VAT fuel scale charges
New scales apply from the start of the first accounting period beginning after 30 April 2005.

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