BUSINESS BRIEF - 13/05

4 Jul 2005 06:15 PM

Contents:
1. Insurance Premium Tax: Implementation of Tribunal decision regarding the liability of the reinsurance of surety bonds 2. VAT: Belated notification of an option to tax land and buildings - clarification of HM Revenue & Customs policy
3. Denatured Alcohol Regulations 2005
4. VAT and supplied of staff - update on the case of University Court of the University of Glasgow (EDN/03/0109)
5. VAT Notes - Issue of VAT Notes 2 2005

1. INSURANCE PREMIUM TAX: IMPLEMENTATION OF TRIBUNAL DECISION REGARDING THE LIABILITY OF THE REINSURANCE OF SURETY BONDS

This Business Brief article announces HM Revenue & Customs' (HMRC) decision not to appeal a recent Tribunal decision (Travellers Casualty & Surety and others), which found that the reinsurance of surety bonds is exempt from Insurance Premium Tax (IPT). It reverses the ruling given in Business Brief 25/2003.

Background
Following a lengthy review, Customs (now HMRC) concluded in 2003 that the reinsurance of surety bonds was in fact primary insurance and therefore liable to IPT (unlike reinsurance which is exempt from IPT). This conclusion was based upon the fact that the underlying bond contracts were written as contracts of guarantee rather than contracts of insurance and therefore fell outside the scope of IPT. Customs took the view that to be 'reinsurance' for IPT, the underlying risk being 'reinsured' must be written under a contract of insurance.

This ruling was announced in Business Brief 25/2003 and implemented from 1 April 2004, requiring businesses writing this type of reinsurance to register and account for IPT on premiums with a tax point falling after this date.

The ruling was subsequently appealed to a Tribunal by seven of the principal UK surety bond underwriters (i.e. the recipients of the reinsurance). They were supported by the Association of British Insurers (ABI) who represented the industry during the period of review.

The Tribunal decision
The Tribunal found that the insurance of surety bonds was clearly a specialist sector of the reinsurance market and there was no case law or textbook that specifically covers its status or otherwise as 'reinsurance'. On balance, however, it decided that the insurance of surety risks did fall within the definition of reinsurance for IPT, on the basis that the wider reinsurance markets regard the transfer of an insurer's surety risk to other insurers as reinsurance, and the interpretation of terms of statute should not conflict with commercial usage without good reason.

HMRC has decided not to appeal this decision.

Practical Implications
As a result of this decision, the reinsurance of surety bonds and similar products is exempt from IPT, irrespective of whether the underlying contract is one of insurance or one of guarantee. Businesses that were registered for IPT solely because of the ruling contained in our earlier Business Brief may now apply to be deregistered. Businesses that have already accounted for IPT on premiums received under surety reinsurance contracts may claim a refund from HMRC as detailed below.

Information on making claims or adjustments
Businesses that think this decision applies to them and have already accounted for IPT may claim any resulting repayment due to them from HMRC by using one of the following methods:

1. where, during the course of an accounting period, you discover previous errors not exceeding £2000 net, an adjustment may be made on your IPT return for the period of discovery (or, if the business is to deregister, the final return) or,

2. if, during the course of an accounting period, you discover previous errors exceeding £2000 net, a separate claim should be submitted to HMRC (in these cases, the errors must not be corrected through your IPT returns). Details of where to send your claim can be obtained from HM Revenue & Customs' National Advice Service on 0845 010 9000.

All adjustments or claims are limited to a three-year period and will be subject to the conditions set out below.

- Businesses must be able to produce suitable evidence that they accounted for IPT on the basis outlined above, and must be able to substantiate the amount claimed.

- HMRC may reject all or part of a claim if repayment would unjustly enrich the claimant. For example, if a business has passed the tax on to the customer but is unable, or does not intend, to pass on the repayment.

A notification to HMRC that a business intends making a claim in the future is not a valid claim.

Further Information
General guidance on IPT and making claims can be found in the HMRC Notice IPT1 'Insurance Premium Tax'.

2. VAT: BELATED NOTIFICATION OF AN OPTION TO TAX LAND AND BUILDINGS - CLARIFICATION OF HM REVENUE & CUSTOMS' POLICY

This Business Brief clarifies HM Revenue & Customs' (HMRC) policy in relation to the exercise of their discretion to accept a belated notification of an option to tax land and buildings. In particular, it explains the distinction between a belated notification and a retrospective or backdated option. This clarification is given following a rise in the number of attempts to notify options to tax that are retrospective or backdated.

Who is affected?
All those who seek acknowledgement of a decision to opt to tax (sometimes known as an election to waive exemption) outside the 30-day time limit.

Background
There are two distinct stages in the process of opting to tax. The first is making the decision to opt, the 'election'. The second is notifying HMRC of that decision, in writing, within 30 days of the date that the decision was made.
Of course, HMRC must be satisfied that the trader was legally entitled to opt to tax. If a trader has made previous exempt supplies of the property, they may require our prior written permission to opt to tax. If permission is required, the trader cannot make a valid election until our permission has been received. The circumstances when permission is required are detailed in VAT Notice 742A Opting to tax land and buildings, Section 5.

Retrospective or backdated options
The option has effect from the day on which the election is made or any later day specified in the election. This means that no option to tax can take effect from a date prior to the date on which the trader decided to make the election. This would be a backdated or retrospective option and HMRC has no discretion under the law to accept or acknowledge that it is valid.

Belated notification of an option
However, HMRC has discretion to accept a notification of an option to tax later than the prescribed time limit of 30 days after the decision to opt was made. The discretion is designed to cover situations where a trader has genuinely made the decision to opt to tax, but has failed to notify it to HMRC in time. Before considering whether to exercise this discretion, we would need to be satisfied that the decision was made on the date stated in the written notification.

Exercising the discretion
HMRC will usually accept a belated notification if a trader provides evidence, such as the minutes of a Board or management meeting, or correspondence referring to the decision. However, we accept that this is sometimes not available, so in its absence we would normally accept a statement from the responsible person, plus evidence that - all the relevant facts have been given;
- output tax has been properly charged and accounted for from the date of the supposed election; and
- input tax recovery in respect of the land or building is consistent with the trader having made taxable supplies of it.
There may be other circumstances where we would accept a belated notification, but this would depend on the individual circumstances of the case.
Conversely, HMRC may not accept that a decision to opt was taken, even when the above conditions are met, if for example - - there has been correspondence concerning or investigation into the liability of supplies of the property in question since the supposed date of the option, and no mention of the option to tax was made; - the trader or his representative has previously put forward an alternative explanation for the charging of output tax (for example, that the supply was not of land and buildings, or was of a sports facility).
Moreover, HMRC reserves the right to refuse to accept the belated notification if to do so would produce an unfair result, or if the exercise of the discretion was sought in connection with a tax avoidance scheme.

3. DENATURED ALCOHOL REGULATIONS 2005
This Business Brief article provides details of new regulations covering the production, distribution and use of denatured alcohol (formerly known as 'methylated spirits'). They take effect from 1 July 2005.

Introduction
The denatured alcohol regime provides for alcohol to be used for industrial and scientific purposes without payment of excise duty, so long as it has been 'denatured' to make it undrinkable. Examples include alcohol used in the manufacture of paints, household cleaners and perfumes.

The Denatured Alcohol Regulations 2005 replace the Methylated Spirits Regulations 1987 (MSR). Many of the requirements in MSR had not kept pace with developments in the denaturing industry and needed modernisation.

Consultation
Businesses were consulted through the development of the draft regulations. In Budget 2004 the Government announced a formal consultation exercise on the regulations. A summary of the issues raised and HM Revenue & Customs' (HMRC) response can be found in the document Draft Denatured Alcohol Regulations 2004 - Summary of Responses to the Consultation, published on our web site www.hmrc.gov.uk/consultation <http://www.hmrc.gov.uk/consultation>

The Regulatory Impact Assessment (RIA) for the Regulations is also published on the HMRC web site.

Businesses and organisations that were sent a copy of the consultation document have already been notified of the publication of the responses document and the effective date of implementation of the Regulations.

An updated Notice 473 Production, Distribution and Use of Denatured Alcohol covering the revised procedures and requirements will be available on the HMRC web site by the middle of July.

Main effects/benefits
The Denatured Alcohol Regulations will modernise HMRC's control of the denaturing industry. In particular, the new Regulations will:

- Replace the Methylated Spirits Regulations 1987, removing some long-standing but out-of-date controls, allowing denatured alcohol traders to carry on their business with less red tape;

- Provide the legal basis to allow HMRC to approve alternative formulations of denatured alcohol when the need arises, removing the need for the Extra Statutory Concession currently in place to allow this;

- Update and modernise UK terminology ('methylated spirits') to bring us in line with what is used in EU legislation ('denatured alcohol').

- Repeal the outdated Iso-propyl Alcohol Regulations 1927, which have not been enforced for some time.

Procedural change

Users of denatured alcohol should note that from 1 July 2005, they must provide their supplier with a copy of their letter of authorization to receive denatured alcohol, rather than their 'annual statement' of entitlement.

Further Information
For further help and advice regarding these regulations please contact HM Revenue & Customs' National Advice Service on 0845 010 9000.

4. VAT AND SUPPLIES OF STAFF - UPDATE ON THE CASE OF UNIVERSITY COURT OF THE UNIVERSITY OF GLASGOW (EDN/03/0109)

This Business Brief article is published in response to enquiries we have received following the Tribunal's decision in the case of University Court of the University of Glasgow and clarifies HM Revenue & Customs' position.

The Tribunal looked at two matters:

- Whether income that the University received in return for making medically-registered staff available to work at certain NHS Trusts, was consideration for standard-rated supplies of staff or exempt supplies of medical care; and
- Whether the method used by HM Revenue & Customs in apportioning non-directly attributable input tax between business and non-business activities produced a reasonable result.

Supplies of staff
On the basis of the facts presented to it, the Tribunal concluded that the supplies in question were taxable supplies of staff. But its findings on this issue do not establish any new principles of law that would apply in every case where employees of one business are working at the premises of another. Businesses entering into this type of arrangement, or wishing to review the VAT treatment of past supplies will still need to take full account of the contractual relationships, in the light of the guidance in Notice 700/34 "Staff".

VAT incurred by Government Departments on supplies of staff cannot generally be recovered under Treasury's direction, issued on 10 January 2003, under section 41(3) of the Value Added Tax Act 1994. This direction is not being reviewed as a result of the Tribunal decision.

Business / non-business
On the issue of the University's business/non-business apportionment method, the Tribunal found that it could not support, in principle, the income based method and calculations that led to HMRC's assessment. In doing so, the Tribunal highlighted some of the weaknesses of the approach adopted by HMRC whilst appearing to favour the input tax based approach, as proposed by Glasgow. HMRC are to appeal the decision, principally on the grounds that the Tribunal focused on the method itself rather than the result it achieved. The purpose of a business/non-business apportionment is to ensure that the taxpayer, in circumstances where the VAT cannot be directly attributed to a particular activity, recovers a fair and reasonable amount of input tax.

5. VAT NOTES - ISSUE OF VAT NOTES 2

VAT Notes 2 2005 (June edition) has been issued. The issue includes items on partial exemption (changes in the Budget); supplies of hot takeaway food; imports of goods from the USA; and reconstructing or altering listed dwellings.

Copies of VAT Notes 2 will be sent to all registered businesses with VAT returns for July, August and September. Businesses using the Annual Accounting Scheme will be sent a copy separately with a covering note.

The views expressed in this Business Brief are those of HM Revenue & Customs.

GENERAL ENQUIRIES:

For general enquiries please contact HM Revenue & Customs' National Advice Service on 0845 010 9000.

This release and other information about HM Revenue & Customs can be found at our website: www.hmrc.gov.uk