HMRC propose to change the rules on apportioning the consideration between supplies with mixed VAT liabilities in a single transaction
HMRC propose to change the rules on apportioning the consideration between supplies with mixed VAT liabilities in a single transaction - Jan Garioch CA discusses a recently issued consultation document.
HMRC published a consultation document on VAT and value shifting on 5 January 2021. They are concerned that where businesses sell a bundle of goods and/or services for a single price some businesses are seeking to exploit the current rules on apportionment of the bundle price to different elements. As an example, they complain that in some instances the trader attributes none of the bundle price to the standard rated element, claiming that it is free. The current law is not prescriptive on how to apportion price and they feel that any guidance from the Courts has been very fact specific. Consequently, they set out their proposed amendments as follows.
Where each item in a bundle is sold separately, the bundle price is to be apportioned in the ratio which reflects the separate sales price of each item. HMRC state they are aiming to prevent any discount on purchasing a bundle from being applied entirely to the standard rated element.
Where none of the items in the bundle is sold separately, the bundle price must be apportioned on the basis of costs which will remove some of the current flexibility on apportionment. HMRC have been concerned about manipulation of the cost base to increase the cost of non-VAT bearing elements. Although value shifting is a listed scheme under avoidance scheme rules, HMRC’s view is that lack of definition in those rules, and a carve out for normal business promotions, has been preventing unfair outcomes from falling under those rules.
Where one or more elements of the bundle is not sold separately, the bundle consideration must be apportioned using the known sales price for the elements where that is known and the cost of the remaining elements. However, there is an exception in situations where the remainder of the bundle consideration (i.e., for elements not sold separately) exceeds the cost of those elements. In that case, the cost figure is not used and the remainder of the bundle consideration must be used instead. HMRC want this to provide legal certainty and achieve a level playing field.
HMRC state that the broad principles of the new rules are set but they are open to hearing about how they can be written into UK law and whether any greater clarity is required. Certainly, their specific questions about proposed changes are targeted directly at businesses with first hand experience of selling these bundles. Any comments from members for incorporation into ICAS’s response to this consultation will be welcome. Closing date for submission to HMRC is 30 March 2021.