Comments from ACCA to HM Revenue and Customs (HMRC), 4 May 2012.
The proposed revisions to the UK VAT code are presented as simplification of borderline anomalies, which are justified on the grounds that they will 'create new sustainable borderlines…reducing uncertainty, and costs for business and HMRC'.
While some of the proposals represent a simplification of the VAT rules, this is by no means the case for all of them. Uncertainty will in some cases be displaced rather than removed, and the removal of zero rating or exemption, while it may not directly increase costs for business, will increase costs for charities and individuals affected by these measures.
The proposals to redefine 'hot food' are not sufficiently precise.
The revised definition of 'premises' fails to address some of the most problematic cases.
Defining sports nutrition drinks by their market positioning is fraught with difficulties. A definition based on nutritional content of the drinks would enable clearer lines to be drawn between sports supplements and meal replacements.
ACCA is concerned that the current proposals may go further than is required to address the mischief identified, and may as a result cause unintended difficulties for other compliant businesses.
The proposed clarifications do no more than put beyond doubt a position which is agreed upon by the vast majority of commentators and advisers. The suggested outlines of tests to ensure that genuine supplies of land remain exempt appear practicable.
While there is currently some apparent inconsistency in the treatment of holiday accommodation for VAT purposes, the proposed measure does not, on balance, seem to improve matters. One superficially simple but practically complex test will be substituted for another, for no identified administrative benefit to HMRC and at a significant economic cost to the affected related manufacturing and service businesses.
It seems likely that Exchequer impact of the change (assuming that the promised extension of the Listed Places of Worship Grant Scheme is fully funded) will be relatively small, and while there are some simplification arguments in favour of the change, there is nevertheless a perceived risk that the revisions will impact unfavourably on the policy of sympathetic preservation of listed buildings by individuals and other charities.
VAT is one of the most important elements of the tax system in the UK. It is responsible for more revenue than Corporation Tax, Fuel Duties, Tobacco Duties, Spirits Duties and Betting & Gaming Duties combined.
There is a well established body of critical theory which indicates that a broad based consumption tax, with minimal derogations or rate variations, is the ideal model. The lack of wrinkles, loopholes and quirks both removes the opportunity to identify tax saving opportunities, and, by allowing for a lower overall rate of tax for a given total income, reduces the incentive to look for them. The broad base reduces the distortionary effects which otherwise arise from differential taxation.
With this in mind, we would expect to welcome the proposal to remove anomalies from the current system. However, it must be borne in mind that there are situations where some policy driven derogation from the broad principles may be acceptable or even desirable.
An example of this is the zero rating of certain basic household essentials. While the cost to the Exchequer in terms of revenue foregone on consumption of zero rated foodstuffs by wealthy consumers far outweighs the value of the benefit delivered by that zero rating to those on low incomes, the cost and complexity of standard rating the items concerned and moving to some form of direct subsidy is, in the short term, prohibitive.
There is a further concern, which is that the zero rating is structural and cannot easily be adjusted as a matter of contingency by the administration of the day. A separately administered positive subsidy is on the other hand widely viewed as being potentially subject to short term devaluation, either as a result of fiscal drag or deliberate reduction. Use of zero rating rather than subsidy is therefore seen as less vulnerable to short term politically driven interference. The introduction of GST in Australia followed this principle, and has nevertheless been widely recognised as a good example of how a modern VAT type system should be structured.
None of the anomalies addressed in the current budget are legislated for directly in the Finance Bill (No4). All were announced in the Budget as subject to further consultation, which is in line with general principles of good taxation governance.
The measures are to be enacted through secondary legislation and will not be part of the Finance Bill scrutiny process. We have been reassured by HMRC that all these measures will be subject to affirmative procedure and will therefore be subject to debate in the House.
We would observe though that the window for public consultation on the measures is comparatively short, and welcome the extension announced by the Exchequer Secretary on 18 April. Nevertheless, it is clear from the presentation in the consultation document of draft legislation that this document sits somewhere in the third stage of the consultation process as reproduced here:
Stage 1 Setting out objectives and identifying options.
Stage 2 Determining the best option and developing a framework for implementation including detailed policy design.
Stage 3 Drafting legislation to effect the proposed change.
Stage 4 Implementing and monitoring the change.
Stage 5 Reviewing and evaluating the change.
While there is probably general agreement that the objectives (simplification of the VAT system) and the options (legislation) are desirable and fixed, we cannot help but be concerned that in proceeding directly to stage 3 the administration has bypassed an important opportunity to establish the likely impacts of different models for policy design.
Indeed, there are good arguments that the consultation process could usefully be started afresh in the VAT context, with a broad remit to identify all areas of the system which would benefit from simplification. The complex and fragmentary state of the VAT systems across Europe is a source of complication to businesses which operate anywhere in the EU, in any one given jurisdiction but even more so if operating across borders. This will have a negative impact
on perceptions of external investors looking at the EU.
We note in this context that similar difficulties with the zero rating of foodstuffs have been observed in Germany, which operates a 'white list' of zero rated foods, rather than the UK practice of derogation from the presumption that all foodstuffs are zero rated. This is, and will remain, an area of difficulty.
The risk with any piecemeal change to the system is that it will simply displace the existing boundary issues which lead to confusion and inconsistency. If discrete areas for change can be identified, then these can usefully be legislated without wider revision or consultation.
However, if, as is the case with some of the measures discussed below, initial external scrutiny by industry and tax experts immediately highlights potential difficulties arising from the chosen approach, this indicates a weakness in the policy design process. Failure to consult early enough inevitably leads to wasted time and costs for all parties, as efforts have to be made to unpick work that has already been done in order to avoid further future costs which would never have arisen had the initial design been more widely consulted.
While there are of course policy areas (in particular anti-avoidance legislation) where early discussion or disclosure if the policy intent may be undesirable, we do not think this to be the case with the majority of the measures proposed in this budget. Even to the extent that anti-avoidance does arise, relating to the self-storage and supplies of land issues, this does not have the short term characteristics of some other schemes, and the introduction of anti-forestalling legislation will further assist in ensuring that mitigation of losses to the Exchequer is not detrimentally affected by early exposure of the intention to clarify the taxable status of the relevant supplies.
Q1: Does the proposed legislation meet its objective of ensuring that all hot takeaway food is taxed consistently at the standard rate of VAT? If not, why not and what changes are needed?
The proposed amendments to the treatment of takeaway food have simply served to highlight the current confusion. The proposal to rely explicitly on the 'ambient air temperature' test for zero rating has focused attention on how unsatisfactory a test this is in practice when applied to certain takeaways and catering outlets. The effect on, for example, a roadside trailer serving food to drivers and other travellers would be to require use of freezer facilities to chill all foodstuffs served in the depths of winter to below ambient air temperature, particularly in the more northerly parts of the country.
While we have been assured by HMRC that this level of absurdity will not become a feature of VAT enforcement, and that a 'common sense' approach will be applied to the application of the legislation, concern must remain that not all traders or commentators will be persuaded that this is the best approach. Common sense is particularly unsusceptible to statutory definition, and while it should of course underpin all tax compliance work, there is an almost inevitability that exclusive reliance on its application will lead to potential inconsistencies of precisely the type that these proposals seek to displace.
Q2: Freshly baked bread which is cooling down will remain zero-rated. Bread will be defined in guidance. What types of bread are most likely to be baked on a retailer's premises and are therefore above ambient air temperature at the time they are provided to customers?
The introduction of novel definitions to police the new borderline between standard and zero rated supplies would need to be undertaken with great care in order to avoid the risk of simply shifting the current inconsistencies and confusion into a new area. Bread comes in many national, regional and cultural varieties, and setting certain products one side of the line or the other based on ingredients (for example) may well result in inconsistencies such that some staple foodstuffs from one diet may be standard rated, while 'luxury' items with few ingredients but complex manufacturing processes could fall to be zero rated. The dividing line between small bakeries, which always prepare their own produce on site, and larger retailers who have the option to structure their supply chain in a tax optimal manner will remain.
Q3: Does the proposed legislation meet its objective of ensuring that food courts, tables and chairs outside a café and similar eating areas are included within the definition of premises? If not, why not and what changes are needed?
The definition of premises is recognised to be problematic. Particular areas of difficulty arise in connection with the growing prevalence of 'mall' type developments with shared seating areas, and informal arrangements such as those found in lay-bys and at outdoor events.
The proposed amendment to the explanatory note to Group 1(a) of Schedule 8 does not in our opinion offer significant clarification in either of the cases set out above. Moreover, it will serve to immediately displace what case law precedent there is to guide businesses in correctly applying the law.
Q4: We have considered impacts on businesses and consumers of the changes to catering and these are set out in the Table of Impacts in Annex B. We would welcome comment on these impacts (including any specific impacts on small businesses) and would particularly welcome details of any impacts we have not identified.
The impact assessment does not appear to directly address the issue of definition of premises.
Q5: Does the proposed legislation meet its objective of ensuring that sports nutrition drinks are taxed consistently with other sports drinks at the standard rate of VAT? If not, why not and what changes are needed?
ACCA has concerns that the policy objective will be weakened, and scope for significant confusion remain, under the current proposals. The complication will arise as a result of the requirement that 'meal replacement drinks' are not affected, and the new definition will apply only to products 'marketed as' sports nutrition drinks. A borderline will remain, and with it the likelihood of confusion, disputes and economic inefficiencies. The point serves as an illustration of the advantages of the principle of as broad a base as possible for any consumption tax.
Market positioning will simply place us back in much the same grey area as before. Most health stores stock both slimming aids and the more specialised sports supplements. This measure will fail if all that happens is that the manufacturers change the label and the product moves 2 shelves to the left, accompanied by widespread dissemination through social networks of the knowledge that 'new product X' is in fact 'Old Product Y' but now in more assuredly zero-rated packaging.
As the consultation paper observes, the world has moved on since 1973. Marketing is no longer the preserve of static billboards, commercial television and posters at point of sale. Establishing the source of postings to internet chat forums, blogs and websites can be difficult. Identifying the individual responsible for controlling that source and uploading information to it can be made effectively impossible by anyone with a modicum of technological knowhow.
As an alternative to the 'marketing' test, ACCA would propose investigating whether it might be possible to frame an exception on the basis of nutritional content of the product. Meal replacement drinks should of course represent a balance of nutrients; sport drinks/bulking agents and the like will by their nature be biased strongly towards one or another particular ingredient, such as proteins, fast absorption carbohydrates/electrolytes etc. The measure would of course have the side effect of requiring manufacturers of slimming products to ensure that even if the health benefits of their products might not match up to the marketing, there is at least no danger of them causing illness through shortages of any given element necessary for a balanced diet if they wish to retain the benefits of zero rating.
Clearly this is an area where HMRC might need to take advice from other experts in nutrition and diet, but ACCA thinks that there is merit in the application of a strict test based on physical characteristics of the good themselves, rather than the somewhat more ephemeral criteria of marketing strategies.
Q6: We have considered impacts on businesses and consumers of the changes to sports nutrition drinks and these are set out in the Table of Impacts in Annex B. We would welcome comment on these impacts (including any specific impacts on small businesses) and would particularly welcome details of any impacts we have not identified.
Q7: We would welcome any views on whether the proposed law achieves the aim of taxing all self storage. If not, why not and what changes are needed? Are there any other supplies which are not of self storage that the changes would capture?
ACCA fully supports the policy aim of discouraging artificial avoidance. However, we are concerned that the current proposals may go further than is required to address the mischief identified, and may as a result cause unintended difficulties for other compliant businesses. As is acknowledged in the consultation, there are many other potential inconsistencies in the VAT treatment of supplies made in connection with supplies in this area of economic activity and a more wholesale review and reform of the area might yield more satisfactory long term results.
Q10: We would welcome any views on whether the proposed law achieves the aim of clarifying that hairdressers' chair rental is taxable? If not, why not and what changes are needed? Are there any other supplies that the changes would capture?
The proposed clarifications do no more than put beyond doubt a position which is agreed upon by the vast majority of commentators and advisers. The suggested outlines of test to ensure that genuine supplies of land remain exempt appear practicable.
Q12: Does the proposed new test adequately ensure that all caravans used for holiday purposes are standard-rated as intended? If not, how might the test be adapted? For example, do you think that it is necessary to introduce a second limb to the test to ensure that zero-rating only applies to caravans that meet the British Standard 3632 and which are also sited or to be sited on land which is not subject to an occupancy restriction (e.g. where use of the caravan as a principal place of residence is prevented by the terms of a covenant, statutory planning consent or similar permission)?
A second leg as suggested here would impose a significant, and potentially insuperable, administrative burden on the first seller of a caravan which might otherwise qualify for zero-rating.
Q16: We have considered impacts on businesses and consumers of the changes on static caravans and these are set out in the Table of Impacts in Annex B. We would welcome comment on these impacts (including any specific impacts on small businesses) and would particularly welcome details of any impacts we have not identified.
We are concerned that the impact assessment does not reflect the potential wide impacts of the proposals. We are also concerned that the impacts which have been identified are not fully recognised.
The Economic Impact section suggests that the imposition of VAT on sales of static holiday caravans may lead to a 'small increase in the price'. We would welcome further expansion on this statement, as it seems unlikely that any UK manufacturing business is currently enjoying margins at the level required to absorb a 20% increase in consumer cost without passing that on to their customers.
It appears from the Impact on Business section that the assessment does expect the costs to be absorbed by the manufacturers, since a 30% fall in demand would undoubtedly lead to significant redundancies and restructuring in the sector. The one off and ongoing costs associated with the reduction in manufacturing capacity and state support for those left out of work as a result do not appear to be reflected in the 'negligible' compliance costs.
There is a further concern that if the cost of UK holidays increases, the net result will be to encourage more holiday makers to consider taking shorter breaks, spending less while on them, or taking their holidays overseas. Every pound spent funding the VAT increase on costs of holiday accommodation is a pound less to be spent in the local economy by holiday makers once they are there. Research for the British Holiday and Home Parks Association predicts that the tax will lead to one job loss for every 15 holiday park pitches left vacant. If UK holidays become more expensive than their overseas equivalent, then all the revenue, both economic to local businesses and VAT to the Exchequer, will be lost.
It should be born in mid when considering this analysis that those holidaying in static caravans as opposed to permanent holiday homes may well already be doing so for cost reasons. They will be particularly sensitive to price increases when deciding whether to go ahead with what is an item of discretionary spend. Even if their inability to spend is limited to just one or two years of current financial restrictions, those one or two years of depressed takings for holiday businesses may well be fatal, and once consumers are in a position to return to their previous patterns of expenditure, the opportunity may have disappeared.
Q20: We have considered impacts on businesses and consumers of the changes to alterations for listed buildings and these are set out in the Table of Impacts in Annex B. We would welcome comment on these impacts (including any specific impacts on small businesses) and would particularly welcome details of any impacts we have not identified.
The suggestion that individuals or charities might be driven to alter, rather than repair building purely by the tax treatment seems odd, given that repair will almost certainly be cheaper in absolute terms, regardless of the tax treatment, than alteration. It should be remembered that alteration to any listed building will be subject to supervision in accordance with the National Planning Policy Framework, and permission will not in any event be given for alterations which substantially affect the character of the listed building.
Repair is clearly not an alternative to extension. If an individual or charity is considering an extension to a listed building this indicates that they are prepared to invest in the continuing use of the building. Discouraging or preventing their continued use of the building is more likely to result in sale of the building to another owner who may not be as sympathetic.
The issue is rather one that heritage buildings are viewed by government as a valuable part of the national fabric The NPPF requires local councils to develop 'a positive strategy for the conservation and enjoyment of the historic environment, including heritage assets most at risk through neglect, decay or other threats.' Removing the current positive tax discrimination in favour of conservation and enjoyment of listed buildings will inevitably increase the risk of their neglect or decay, so while the proposed simplification of the tax system may be justifiable on those grounds, we do not agree that reducing the financial burden on those prepared to invest in the continued use and enjoyment of listed buildings, albeit perhaps altered in such a way as to remain useful in the modern world, is a desirable outcome.
The proposed measures might be acceptable if some other positive subsidy, similar to the current Places of Worship scheme, were to be introduced in replacement of the existing scheme. Since the Church of England is responsible for 45% of all listed buildings in the UK, the overall revenue impact of the measure will clearly be significantly diluted, and indeed revenue protection is not cited as an aim of the proposals. However, in the absence of such a countermeasure to offset the otherwise negative policy effects of the withdrawal of this support we do not necessarily consider that it represents an improvement to the overall tax system.
In tax system terms, there is no particular justification for using this as the mechanism to deliver an advantage to those altering listed buildings. There is an inherent complication in choosing to define the nature of a supply for tax purposes by reference not to its own intrinsic characteristics but, rather to extrinsic characteristics of the consumer of the supply. Ie A lorry full of building materials which would normally be standard rated – if part is supplied to a customer who is renovating a listed building, and part to a new build, the VAT treatment currently differs. This introduces a complication to the VAT system which does not need to be there for any particular taxation reason; the justification is pure policy.
This case highlights a particular example of the concerns discussed above, that policy decisions have been taken without the benefit of widespread consultation which might have averted potentially disruptive revisions to the system. The consultation document describes the incentive to alter listed building as 'perverse'. However, ACCA has heard evidence from specialists working in this area which indicates that in many cases businesses are prepared to take on heritage buildings as opposed to greenfield development in large part because of the VAT treatment. Removing that incentive will mean more heritage buildings lie unsold and unmaintained, while greenfield development takes its place.
This particular simplification of the tax system has a direct impact on a clearly defined policy position. The current measure is an effective hypothecation of the tax expenditure. Withdrawal of the tax expenditure has a direct and negative impact on the implementation of that policy position. The measure is justified solely in terms of simplification of the VAT system, rather than any underlying policy decision to remove the incentive to preserve heritage buildings.
If this is the case, then ACCA would expect to see other measures taken to preserve the incentive, but doing so through means which do not cause a complication in the VAT system – for example, the extension of the LPWGS. Since 45% of listed buildings are owned by the Church of England, and many others may qualify as places of worship, the Exchequer impact of moving to direct subsidy rather than tax expenditure will be minimal, provided that the LPWGS is fully funded. Here again, while there are indications that some support may be forthcoming, we note that even now the LPWGS is not fully funded.
However, consideration should be given as to whether the VAT measure is in fact the most effective overall delivery mechanism for the policy. Imperfect though it may be, if it is as effective or more so than other mechanisms (eg grants or subsidies) then the justification for change in the broader context is weakened potentially to the point of nonexistence. The existing measure does not cause the sorts of problems of definition which underpin for example the catering or sports nutrition drinks proposals. It will be quite clear whether particular supplies are in pursuance of 'approved alterations' as these alterations will have been subject to the planning process and affirmative action on the part of planning officers in order to qualify as approved alterations. If the measure operates efficiently and as intended to give effect to wider policy intentions, it should not be withdrawn purely on the grounds of tax system simplicity or coherence.