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HMRC: Addressing, or not, borderline anomalies

Wednesday, May 16, 2012

by Nick Ryan

HMRC released their consultation document on 21 March on VAT: Addressing borderline anomalies. This followed on from the budget announcement. I have practiced in VAT, on both sides of the fence, for twenty one years and in that time have been constantly amazed at the anomalies there are both in the application of and interpretation of VAT. VAT and anomalies go together like cheese and cucumber in a sandwich, we expect them, we, at times, relish the opportunity they can provide and we are often driven to moments of frustration at the results they can produce.
In these difficult times, many businesses find themselves under pressure from their customers as to the cost and delivery of their product, some buyers use this influence to drive down costs and VAT is being heavily targeted in some industries where VAT is a non deductible cost. Interpretation is becoming a key focus by some businesses in looking for a window of opportunity to argue their supply is subject to VAT either at a lower, and therefore more competitive rate, or not applicable to VAT at all. At times this drive is flagrantly an abuse of the law but in these difficult times where cost is key then any measure that can be seen to reduce cost becomes a primary driver.
HMRC’s consultation document for many practitioners falls short of the mark by focusing on what many would argue are the obvious choices and others would argue are not really anomalies at all. The key areas where HMRC are looking to remove the anomalies were in sports drinks, catering supplies, hairdresser’s chair rental, self storage, holiday caravan hire and alterations to listed buildings.
It is anticipated that legislation will be introduced to address these long-standing VAT anomalies and loopholes, once the findings of the consultation process are announced, with effect from 1 October 2012. The purpose here is to eradicate where possible the anomalies in VAT where similar supplies have different VAT rates. HMRC intend by these to changes to reach agreement that the standard rate is the applicable rate in these areas and/or confirm that this is the case. The main areas of concern are:
 Approved alterations to listed buildings: the same treatment to apply as with the VAT treatment of alterations to non-listed buildings, and repairs and maintenance for all buildings.
 Self-storage and other forms of storage: to apply a consistency in treatment.
 Hot food and sports drinks: to seek to apply VAT on these supplies where it currently does not apply, consideration here as to what qualifies as “hot” food.
 Rental of hairdresser chairs: to clarify the position beyond doubt thereby avoiding future further litigation and/or dispute.
 Holiday caravans: Ensuring that the purchase of holiday caravans is taxed consistently at the standard rate.
This is a very interesting announcement and should be monitored closely. We have witnessed the broad discussion in connection with medical services and I believe we will witness similar levels of discussion with a possibility of increased litigation among these targeted sectors. The proposed changes to the VAT treatment of certain food items, and whether they are hot or not, should result in a lively consultation process. If HMRC get their way, then a number of parties within the food sector may be caught.
Within VAT practitioners the response has been mixed ranging from the areas to be addressed to be too narrow to that the proposals are biased in that they largely seek to reaffirm HMRC’s view on what the treatment should be rather than consider an alternative based on previous arguments put forward in the past. Some practitioners have expressed their concerns that the process has not identified anomalies but rather are disputed areas in VAT which courts have to date provided decisions that are not favourable to HMRC.
One issue that has not been considered is how in practice these changes will impact on both businesses and consumers in the management of complying with these proposed changes and the impact on price reflecting these changes. Here are some examples of other anomalies that I, and other practitioners, would have welcomed as part of this process:
• Bicycle: standard rated BUT bicycle helmet required under law and safety regulations to ride it zero rated.
• Childs pushchair: standard rate while car seat is eligible at the reduced 5% rate and clothes are zero rated. Baby for these is the same.
• E-book: 20% while paper book is zero rated.
• Sausage roll sold as hot food proposal is to reaffirm it is standard rate BUT if the customer can wait until it cools down, would it be zero rated?
• Listed buildings: why differentiate between repair and alteration?
In conclusion I think HMRC has missed a golden opportunity to deliver a welcome and refreshing change to how VAT applies but perhaps this is just the first of many to come?
If you would like further information on these changes, or on other VAT issues then please contact Nick Ryan at the VAT Practice. Alternatively post your comment below.