VAT revisions get ready to roll
In the March Budget, Chancellor George Osborne announced a range of measures aimed at ending anomalies in the VAT system which currently result in VAT being payable on some items while other similar products escape the VAT net. Many of the changes attracted criticism, and the Chancellor has been forced into a U-turn as regards the more controversial aspects. The Guardian summed up the situation: “if you enjoy eating supermarket rotisserie chicken in your holiday caravan while doing up a historic home, life could soon become more expensive.” The changes will generally take effect from 1 October 2012.
The way that VAT is charged on food can often be bizarre. VAT is payable at the standard rate on hot takeaway food, but supermarkets have argued that their hot food, such as rotisserie chickens, is not for immediate consumption and is only kept hot to improve its appearance and aroma – their hot food has therefore been zero-rated.
The original proposal was that VAT would be charged on all food above the ambient air temperature at the time it was provided. This has been changed so that VAT will now only be applied to food which is kept hot, or if the natural cooling process is delayed – such as food kept in heated cabinets. VAT will also apply if food is cooked hot to order or if sold in heat retaining packaging. So sausage rolls and hot pasties can continue to be zero-rated, but there is no reprieve for rotisserie chickens. The meaning of ‘premises’ has been clarified so that shared food courts and tables and chairs outside a café are included. Another anomaly that will be rectified is the VAT treatment of body building drinks. Despite their similarity to other sports drinks, such drinks have managed to avoid VAT because of their nutritional content.
Currently, the sale of a caravan that can be towed by a typical family car is subject to VAT, but larger caravans escape VAT even though they may be used for holiday purposes. This treatment will be replaced by one that zero-rates only those caravans that have been designed and constructed for continuous year-round occupation. The sale of all other caravans will be subject to VAT. Originally, VAT was to apply at the rate of 20% from 1 October, but it will now be at the reduced rate of 5% – and not until April 2013.
The VAT treatment of listed buildings is complex. Currently, repairs and maintenance are subject to VAT, but approved alterations are not. The rules therefore give an incentive for change rather than repair, and the Government contends that much of the extension work undertaken is not necessary for heritage purposes. The zero-rating of alterations to listed homes and other buildings will therefore be removed, and this means that the cost of renovating some of the country’s most valued buildings will soar. But it will make the rules much simpler for businesses to understand, because it will no longer be necessary to make the often difficult distinction between alterations and repairs.
The supply of self-storage, which is a supply of a discrete area of land, is currently exempt from VAT – but other types of storage services such as those offered by removal firms, safety deposit boxes and renting garages are not. Again, the playing field is to be levelled by the removal of the exemption.
The final measure is not remedying an anomaly as such. When hairdressers rent a chair to self-employed stylists, VAT must be paid on the rent charged. Nothing has actually changed, because the High Court had previously decided that such a supply cannot be exempt. The hairdressing business is supplying a whole package of services – not just the supply of ‘land’. However, the matter has now been put beyond doubt and will force the remaining minority of non-complying salons to conform.