Value Added Tax in the transport industry

22nd September 1972, Page 183

22nd September 1972

Page 183

Page 184

Page 183, 22nd September 1972 — Value Added Tax in the transport industry

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by L. J. Boulter

VALUE-ADDED TAX, when introduced, will replace both purchase tax and SET. The VAT on all purchases of goods (including capital equipment) and on services, for use in the business of a "taxable person (which includes businesses)", will be recoverable at the end of each tax accounting period and all tax charged to customers on goods and services must be remitted to the Customs and Excise. The intention is that the tax shall be borne completely by the final consumer of the end product and not by registered industrial and commercial undertakings.

If then VAT is correctly integrated into the accounting system it should have little effect on costings. Some benefit may be gained from the increased cash holdings represented by the tax collected in advance of the official return. The substitution of VAT for purchase tax may be of marginal benefit — items previously charged with purchase tax (not recoverable) will now be charged with VAT (recoverable). But unless accounting is arranged so that assessment, collection, and remittance to the Customs are routine accounting functions the cost of administration may well exceed any benefit.

Obviously the accounting should pick up all items of tax on purchases made in the course of business. For example, tax on protective clothing, hand tools, towel and other laundry services, cassettes for "music while you work", building repairs and renovations, flower decoration services, taxi fares, and stationery items bought out of petty cash, can all be included as deductible inputs. Tax incurred in the course of business entertaining, however, is not deductible unless for overseas visitors and neither is the tax on business cars. The large items take care of themselves but some attention to the small recurring ones may be needed.

Similarly on sales, or "Chargeable Output" as VAT jargon has it, it is necessary to ensure that tax is raised on all chargeable transactions.

At the centre of VAT accounting is the tax invoice or an equivalent acceptable document. The tax invoice for a purchase is the prime evidence of entitlement to credit as a deductible input of the tax charged. Any official verification will include an examination of tax invoices justifying previous tax credits. The invoices should therefore be preserved as though they were encashable documents.

Vehicle purchasing and maintenance

Commercial vehicles and passenger vehicles exceeding 3 tons unladen weight are outside the scope of the new 10 per cent wholesale tax on vehicles which is to be introduced when purchase tax is abolished, but VAT will be charged on all vehicles.

The incidence of VAT, however, hardly affects the choice between the methods of vehicle purchase available to registered traders. On a cash purchase VAT is paid on the net cash price but is refundable at the end of the tax period. In a hire-purchase transaction VAT is charged on the net cash price before the addition of interest charge. The amount of the interest charge may be increased by that on the interest element, but as the VAT can be reclaimed at the end of the tax period it could be used to reduce the debt outstanding. Tax on hiring or leasing is payable on the periodic charges as they arise. A change in tax rate will affect all payments after the date of the change, but again the tax paid will be recoverable as a deductible input.

Vehicles purchased outright or by hire purchase before "V" day will not pay VAT if they are delivered before that day but

those on leasing or hiring agreement will attract VAT at the current rate on all payments made after "V" day, even though an agreement was concluded before the introduction of the tax.

Although VAT will be charged on all replacement spares and on servicing and repair charges, all the tax will be recoverable as deductible input by registered operators so again the tax is neutral as between those carrying out their own servicing and those using outside contractors.

Expense accounts

Tax charged on business cars and on business entertainment other than for overseas customers is not deductible and this will probably extend to tax on passenger car hiring. The extent to which this provision will restrict the rebate of tax 'paid on charges for accommodation and meals incurred by staff engaged oncompany business must await the publication of the Treasury Order.

Broadly, tax charged on goods or services supplied in the course of business is recoverable and this should certainly extend to tax on accommodation, but then only insofar as a tax invoice or equivalent acceptable document can be produced. The principle is that Customs will only credit tax that can be shown to have been paid by the customer (claimant) and prima facie received by that department from the supplier. This means that the supplier must be a registered person. Small boarding house establishments are unlikely to be registered, so a separate VAT charge will not arise. Hotels on the other hand will be geared to provision of tax invoices both for accommodation and meals. The provision of free meals and accommodation as part of a contract of service, as for example with employees in the catering industry, is unlikely to give rise to a VAT charge but the extent if any to which an employer can reclaim tax on meals bought by employees travelling on the firm's business must await the issue of regulations.

Passenger transport The transport of passengers in any vehicle designed or adapted to carry no fewer than 12 passengers is zero rated. The transport of passengers (any number) outside the United Kingdom or to or from a place outside the United Kingdom is zero rated. With the above exceptions, passenger transport services are charged with VAT, including of course self-drive hire services.

The application of the zero rate principle is not difficult. All the tax on eligible inputs to the business is deductible in the normal way and tax will not be added to the existing charges for passenger transport. Evidence must be available to show that transport not charged with tax was correctly classified.

It is unlikely that registered operators hiring chargeable passenger transport will be allowed to reclaim tax charges.

Freight transport All charges for the transport of freight within the United Kingdom are chargeable with VAT but of course the tax may be reclaimed by the customer if he is registered for tax and the charges are incurred in the course of his business. The incidence of VAT on freight charges for goods which are exported introduces complications. Exported goods are freed from all VAT but the stage at which this happens varies with the type of transaction.

Freight charges on goods transported to the docks or airfield on the order of the exporter are liable to VAT and the exporter reclaims the tax as a deductible input. Charges on goods carried to the docks or airfield on the direct order of an overseas customer who will pay the operator are zero rated, ie no tax is charged. TIR transport charges are zero rated.

In general, the only person entitled to zero-rate export charges is the one who will receive payment from abroad.

Under Section 8(6) of the Act the Treasury have power to substitute other provisions than those on which the above examples are based and here again the final procedures must await the publication of official details.

Management responsibirrty Registration for VAT commences next month (October) and the tax comes into force on April 1 next. It is apparent therefore that management must take immediate action to bring VAT into the business administration. In this respect the following list of points for consideration may be helpful.

I. Arrange for management to be informed on basic VAT procedure (eg by attendance at a seminar).

2. Appoint a senior executive to be responsible for co-ordinating all aspects of VAT affecting the business.

3. Analyse company financing and accounting to determine the effect of VAT and other tax changes.

4. Consider the best way of grouping or separating subsidiaries or divisions within a company to minimize inter-company or inter-divisional tax accounting and to obtain the maximum benefit from the tax credit procedure (eg by improved cash flow). This must be completed before company policy on registration for tax purposes can be determined.

5. Ensure that those responsible for accounting changes, including computer programming, are informed of all the factors affecting programme amendments required for the introduction of VAT, the abolition of purchase tax, the abolition of SET and any other changes which may be introduced.

6. Consider what modifications to accounting are necessary, eg the layout of tax invoices. 7. Initiate a programme of basic training in VAT procedure for the staff concerned. This will embrace not only those directly concerned with accounts but also those having responsibility for purchasing services, sales, etc.

8. Assess the cost of administering VAT within the. company, and quantify any benefits obtained from improved cash flow, etc.

In relation to staff training for value-added tax, DITB grants are available to those paying training levy.

In Appendix 1 I have shown an example of a typical invoice under the new tax, while Appendix 2 is a specimen VAT account.