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HM Revenue and Customs Brief 47/10


HM Revenue and Customs -Tax Authorities

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Issued 3rd November 2010

VAT: secondary legislation to implement the VAT Technical Directive, the VAT rate increase and other miscellaneous changes


Budget Note 42 (22 June 2010) detailed the introduction of legislation to implement changes to the recovery of VAT for immoveable property, boats and aircraft to implement the EU VAT Technical Directive (Council Directive 2009/162/EU). As announced, the Capital Goods Scheme rules will be amended to allow for an adjustment mechanism, as required by the new EU VAT law.

The purpose of this Brief is to expose the draft legislation amending the VAT Regulations for a period of four weeks, to invite comments on it and to provide an explanation of the changes.

Alongside these amendments, HMRC intends to make other changes that are intended to simplify or update the current rules for the Capital Goods Scheme (CGS). HMRC will also regularise an existing Extra Statutory Concession linked to the option to tax and reaffirm an area of policy that has been the subject of litigation. There will also be two unrelated changes to the VAT Regulations which are required as a result of the standard VAT rate changing to 20 per cent from 4 January 2011.

Who needs to read this?

Taxpayers buying land, property, boats and aircraft on or after 1 January 2011; partly exempt taxpayers and those with non-business use of assets in the CGS; taxpayers acquiring CGS assets before they register for VAT; and representative members of VAT groups with CGS assets.

Taxpayers using the Flat Rate Scheme and taxpayers making supplies at the standard rate of VAT should read the section below on the increase in the VAT rate.


The key changes are outlined below. You will find more detailed information about the changes in Annex A; the draft legislation and explanatory note can be found at Annex B.

The Technical Directive

The Technical Directive requires all Member States to introduce an adjustment mechanism to take account of changes in use of certain assets when VAT recovery is restricted only to the business use of the assets (excluding any private use by the taxpayer or the taxpayer’s staff) from 1 January 2011. In line with these requirements, HMRC intends to widen the scope of the current CGS so that it not only caters for changes between taxable and exempt business use (as now) but also for changes between business and non-business use of assets. This will mean businesses having to complete one adjustment mechanism rather than two.

Ships and aircraft costing £50,000 or more will be included in the CGS to ensure that taxpayers are able to adjust VAT recovery if use changes. Where these assets cost less than £50,000 they will not have the burden of undertaking any adjustments.


While making these changes, HMRC will take forward the final phase of the three year programme of partial exemption and simplification proposals, on which business has been consulted. The key simplification measures proposed are:

  • giving taxpayers the option of seeking approval for a combined method for dealing with taxable, exempt and non-business activities. Currently taxpayers can only apply for a special method to deal with taxable and exempt business activities. Introducing this option would streamline and simplify the VAT deduction process, give certainty and complement the Technical Directive changes;
  • reducing the administrative burdens on taxpayers whose use of an asset changes only slightly – HMRC intends to legislate to ensure that insignificant CGS adjustments are disregarded, whether they favour HMRC or the taxpayer.

Legislating for a concession

As part of its programme of regularising extra-statutory concessions, HMRC announced in April 2009 that it would be considering the future of one of its concessions, which allows VAT recovery under a CGS type calculation by a person who was not registered for VAT at the time they acquired a CGS asset. The draft legislation now covers this extra statutory concession, which will be withdrawn on the day the legislation takes effect. The concession links to the option to tax and is referred to in paragraph 9.4 of Notice 742A.

Policy clarification

HMRC has clarified in the draft legislation that the representative member of a VAT group is the owner for VAT purposes of all CGS items owned by companies while they are within the group. The legislation also clarifies who the owner is where there is a transfer of a going concern (TOGC) and other cases where there is a transfer without a VAT supply. There is no change to HMRC’s policy in these areas and the new legislation aims only to put the matters beyond doubt.

Increase in the VAT rate - consequential changes

There are two consequential amendments required to implement the 4 January 2011 increase in the standard rate of VAT. This legislation establishes the invoicing requirements for the supplementary charge arising under the anti-forestalling legislation and sets the new rates and thresholds applicable under the Flat Rate Scheme (see What to do if your flat rate percentage changes ).


With the exception of the consequential changes required as a result of the VAT rate increase, which will take effect on 4 January 2011, all the amendments outlined above will take effect from 1 January 2011.


If you would like to make any comments about the draft legislation please email Lara Pritchard by 30 November 2010.

Further information

Further information can be obtained from the HMRC website or by contacting the Helpline on 0845 010 9000.

Annex A

Technical note on planned changes Annex A (PDF 29K)

Annex B

Draft Value Added Tax (Amendment) Regulations 2010 Annex B (PDF 58K)

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Article Published/Sorted/Amended on Scopulus 2010-11-05 16:03:41 in Tax Articles

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