Feedback sought on VAT and value shifting rule changes
7 Jan 2021
HMRC is consulting on planned revisions to the rules for apportioning the VAT consideration between supplies with mixed liabilities in a single transaction, in a bid to tackle ‘inappropriate’ value shifting when providing bundles of goods or services
7 Jan 2021
The current law in section 19(4), Value Added Tax Act 1994 (VATA 94) is non-prescriptive and some businesses pay less VAT by apportioning more consideration (or ‘shifting the value’) to non-standard rated items, HMRC claimed.
HMRC said this particularly applies in circumstances where businesses sell a number of goods or services for a single price as part of a package (or ‘bundle’). One or more items in the bundle may be advertised as discounted, but the discount is only available if all the bundled items are purchased together.
The separate elements of the package may have different VAT liabilities, and HMRC said some businesses seek to exploit the existing rules to reduce the amount of VAT they account for.
They do this by apportioning less of the total bundle price to products that are standard rated than appears to be justified, given the normal price a customer would pay for those items if sold individually. In some instances, business have attributed none of the price to a standard rated item, claiming that it is free.
The current law does not prescribe any particular method on how to apportion the price of items bundled together in a single transaction. Some guidance has been provided by the courts, but HMRC claimed this has not given a clear steer as it is on a case by case basis and has been very fact-specific. Under the existing legislation, businesses are permitted to calculate the VAT due on such transactions on the basis of how much the various items cost the business, even where items in the bundle are sold separately and thus individual sales prices are known. Where individual sales prices are not known, calculations can also be based on an estimate of the market value.
The government plans to amend the current legislation and mandate methods for the apportionment of output tax on bundled supplies with mixed VAT liabilities in a single transaction. HMRC said this will provide legal certainty and make the calculation of VAT for mixed supplies more straightforward, thus levelling the playing field for all businesses.
The new legislation will introduce mandatory valuation methods. Cost-based apportionments will not be permitted where items sold in bundles are also sold separately, and therefore their individual sale prices are known. Estimates of market value will not be permitted at all and use of cost will be mandatory for items which are not sold separately and therefore their actual market value is not known.
Where each item in a bundle is also sold separately by the supplier, an apportionment based on the separate sale price of each item will be mandatory. Where one or more items in a bundle are also sold separately and one or more of the other items in the bundle are not sold separately, the consideration must be apportioned using a combination of sale price(s) where known and cost(s) where the sale price(s) is not known.
However, where the difference between the total consideration for item(s) where the sale price is known and the total consideration for the item(s) where the sale price is not known (the remainder) is greater than the total consideration for item(s) where the cost is not known, the remainder must be used.
Where none of the items in a bundle are also sold separately, cost-based apportionments will be mandatory.
Although the broad principles of the new rules are set, the consultation is seeking views from businesses on how these can be written into UK law, as well as feedback on any issues that the new rules may present and any areas requiring greater clarity. Businesses are also invited to provide suggestions of other ways to tackle the issue of value shifting.
The consultation closes on 30 March.