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Guest opinion: VAT increase 'highly likely'

A higher rate of VAT?
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In view of the new Government's stated objective of reducing the deficit, we believe it is highly likely that VAT rates will increase in Tuesday's 'emergency' Budget.

It is now 15 years since the landmark VAT judgements in the Italian Republic and Elida Gibbs cases highlighted that HMRC's previous treatment of profit margins and bonuses on demonstrator vehicles was incorrect.

A hike in the standard rate from 17.5% to 20% is likely to generate additional revenues of £11.5bn, the cost of which will fall in large part on consumers.

For motor retailers, the announcement of such a rise may act as a short term stimulus to sales.

However, whilst assisting as many as customers to benefit from the existing VAT rate, businesses will need to be aware of rate change rules and any 'anti-forestalling' provisions that are introduced to limit the scope for VAT planning.

Retrospective VAT claims
It is now 15 years since the landmark VAT judgements in the Italian Republic and Elida Gibbs cases highlighted that HMRC's previous treatment of profit margins and bonuses on demonstrator vehicles was incorrect.

However, this is still a live issue for many retailers who made further, retrospective VAT reclaims following the Fleming/Conde Nast judgement in 2008.

As HMRC work through the many thousands of claims submitted in advance of the March 2009 deadline, a number of clear points of dispute are emerging.

This is principally the result of HMRC taking a different view to taxpayers as to VAT accounting likely to have been applied to the relevant transactions in periods dating back to the 1980's and beyond.

For businesses with material sums still at stake, it is worth noting that HMRC's approach to these matters is continuing to evolve. It is also likely that, over the coming months, the VAT tribunal will be asked to arbitrate on certain points of contention. As a result, it remains possible that some of the claims that are currently held up will ultimately be repaid.

Businesses should therefore seek advice as to the merits of continuing to resist HMRC's arguments, possibly be means of an appeal to the VAT tribunal, rather than conceding defeat at this stage.

Compound interest
The complex arguments regarding the entitlement to compound interest on VAT reclaims are continuing in the Courts with motor retailers very much to the fore.

In late March, the Court of Appeal handed down judgement in the VAT Interest Cars Group Litigation (VIC GLO), finding against the test claimants on the basis that too much time had elapsed between the discovery of the relevant tax overpayment and the making of the associated High Court claim.

One of the complexities of this litigation has been the continuing doubt as to the appropriate route by which taxpayers should seek a compound interest remedy. Whilst the VIC GLO has been focused on securing a 'restitution' remedy via the High Court in VIC GLO, a parallel stream of litigation has been developing in search of a 'statutory' remedy.

Attention will now focussed on the next stage in this litigation when the preliminary stages of the so called Compound Interest Project test cases ('CIP') are heard by the Court of Appeal in June.

It now seems likely that a referral to the European Court of Justice will be required to resolve this matter, with the result that the final outcome may not be known for another two years. In the meantime, all potential claimants need to have due regard to the time limits that might apply to these claims. In particular, recent Tribunal rulings have highlighted the importance of appealing within the 30 day time limit when an initial claim for compound interest is rejected by HMRC.

New opportunities
The fast moving nature of VAT case continues to throw up new opportunities.

Following last year's European Court judgement in the case of TNT Post UK Limited, HMRC has now accepted that not all services provided by the Royal Mail should be exempt from VAT. Where, for example, Royal Mail provides bulk mailing services under an 'individually negotiated' arrangement, HMRC intend that in future these services will be subject to VAT at the standard rate.

Whilst HMRC are focusing primarily on the future impact, this development also opens up the possibility that Royal Mail customers might be able to seek a retrospective VAT repayment if they have previously paid over amounts without realizing that these were VAT inclusive.

There are still a number of significant hurdles to overcome before any repayments are forthcoming. However, for retailers with a significant postal spend an historic VAT claim, if successful, could be material in size.

Businesses affected by this development should take advice as to the merits of submitting a 'protective' claim until the issue is finally resolved.
 

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