VAT on BW Licences

[Arnot]

Thanks for that debbifiggy. It does clarify BW’s approach (even if I don’t agree with it!)

 

To take the points as they are made;

 

Firstly it is important to understand how VAT applies to a business. BW is required by legislation to be registered for VAT. If you are registered for VAT you must charge VAT on all of your supplies where the law requires it.

I agree with the principal and understand it but what does BW supply? I don’t think that a licence could be considered goods or a service. Of course if it is then there would be a contract and the supplies or services would be defined in some respect and they don’t seem to be. The crucial point in this statement is in the last sentence “where the law requires it”, it is my contention that in the case of a licence, the law does not require it!

 

A VAT registered business regularly completes a VAT return in which it pays to HM Customs & Excise all of the VAT it has collected from customers and reclaims all of the VAT it has incurred on goods and services it has acquired.

Agreed, this is the basic operational system. Note the use of “goods and services” again, there are some items of business expenditure such as insurance and purely financial costs such as interest and bank charges that are exempt.

 

However it is only possible to reclaim any VAT incurred if the VAT can be attributed to taxable business activities.

The interesting word here is “taxable”, this is the only bit that I am not sure about and I do not think it is correct. There are many businesses in this country where the majority of their output is not taxable or, to be more specific, is zero rated or exempt. (Bearing in mind that items that goods and services that are zero rated are still deemed “taxable”)

 

The majority of all BW expenditure on the general maintenance and major repairs of the canal infrastructure includes VAT.

Not according to the accounts… the majority of the expenditure is on the payroll.

 

Prior to 1989 BW did not charge VAT on its craft licences and as a result was unable to recover VAT on its general repairs and maintenance of the canals.

But that’s not to say the two are necessarily conditional, it may be that prior to 1989 BW was merely not registered for V.A.T. and this in itself would preclude reclaiming input tax. If it had been registered, it would have been able to reclaim input tax regardless of the output tax liability.

 

In 1989 BW opted to charge VAT on its property including canals to enable it to generate taxable activities (including charging VAT on the craft licence) on the canals, which in turn enabled BW to recover the VAT incurred on general maintenance and refurbishment.

See my last… from this I discern that it was an option that BW had to charge V.A.T. on licences rather than being mandatory or a “where the law requires it” to return to paragraph 1. Once again the requirement to charge output tax on a licence and the right to reclaim input tax on legitimate business expenses are not conditional on each other.

 

At the time BW did not increase the overall cost of the craft licence to the customer. If for example the licence at the time cost £300, after BW opted to charge VAT the licence still cost £300 (£255+ £45 VAT). In other words this cost was not passed on to BW’s customers.

This is probably the best argument they have… i.e. that the licence has always been calculated on a “tax inclusive basis”. However I can’t help feeling that if BW were really a commercial operation rather than a camouflaged government department then they would have some concern for their customers (in this case the ones who pay the bills not the casual users of the facilities) and any element of competition would focus their minds on keeping prices down. As it is there is no competition and no incentive to BW to keep costs down. There is however an incentive to keep bonuses up. Perhaps if there were a director’s bonus for reducing licences things would be different?

 

Without this option to charge VAT on the craft licence, at today’s level of expenditure on the canal infrastructure, BW would be losing up to £20 million per annum in lost VAT on the general and major repairs, and the price of the craft licence and other income streams would need to be increased by a significant amount to offset this loss.

This would imply that the difference between BW’s output tax on its licences, sales of goods and services and rents and the input tax it pays on taxable purchases is in the region of £115m per annum. Its stated licence fee income for the last period that accounts are published (2007/8) is only £13.4M and the total commercial income is £102M so this is difficult to understand. The V.A.T. on Licences on this basis comes to £2.345M

 

Why doesn’t the Environment Agency charge VAT on their Craft Licence

 

The EA has a special exemption in VAT legislation that allows them to reclaim the VAT suffered on work carried out on their waterways. This means it does not need to make the same election as BW. Our request to HM Treasury for BW to have the same special exemption as the EA was rejected. This is why the VAT position for the two licences is different between the two authorities.

I would love to know just what that special exemption is. My reading is that as a government agency issuing licences, they are not able to register for V.A.T and thus not able to charge it. When it comes to reclaiming V.A.T., from whom would they reclaim it? HMRC is just another rather arbitrary accounting budget within the general funds of the government. The last sentence is interesting in that it identifies both BW and the EA as “authorities” rather than a company and a government agency, which are a very different kettle of fish. Very fishy!

 

In essence it seems to boil down to the fact that BW are not in fact a company in the normal sense of the term as they are presented but a quasi independent government agency. If it looks like a duck and quacks like a duck it is a duck! It looks like a government agency and acts like a government agency therefore… Given that this is the case, then it should not be charging V.A.T. at all let alone on Licences. Alternatively, even if you accept that BW is a company and a commercial concern then licences should still not carry V.A.T.

 

Finally I have to say that I am sure that if BW were a true company who had to compete for their business and had a customer base that had choices, they would have fought HMRC over the issue of licences tooth and claw. As it is, they can charge what they like and there is little the customers can do about it.

 

It has been said that the issue of V.A.T. on Licences would be arguable, the difficulty is that it would have to be BW who argued it and why would they want to rock the boat?

 

Rant over (for now)

 

Regards

 

Arnot

[david and julie]

it has no choice but to charge VAT. It is beyond their control and therefore a waste of effort our trying to change it. It won't wash.

 

As I see it BW does have a choice whether it charges VAT or not on property and land. They say "in 1989 BW opted to charge VAT on their property including the canals" That means they registered the land and property irrespective of the VAT status of other aspects of the business. They did this to enable them to claim back the VAT they paid relating to that land and property. This means they then have to charge VAT on invoices etc relating to whatever property they registered. You can't have it both ways, if you register you can claim back and if you don't register you can't.

 

They didn't have to (and probably didn't) opt to tax every piece of land or property they own, but they probably did register the canals as otherwise they couldn't claim back on say dredging, towpath repairs etc.

 

The one part I'm not sure about here is that these regs normally apply to land and property and I find it hard to believe that water(they said including the canals) would fit into either of these categories, I assume they are calling the water property.

 

As an example, lets assume someone runs a TV business, and rents out the offices above his shop. He is VAT registered so claims back the VAT on what he buys for his electrical business and charges out VAT to his customers. The offices above which he rents out are separate for VAT purposes. By default the offices wouldn't attract VAT, which means he couldn't (shouldn't )claim back any VAT on say repairs etc, to the offices. If he wanted to claim that VAT back he would have to change the default option(opt to tax) and this would mean he would then charge VAT on the rent.

 

I have no idea whether a licence as such should attract VAT or not, but I do agree with BW's thinking and I find it hard to believe they didn't check it out as they would be wide open otherwise.

[david and julie]

Not according to the accounts… the majority of the expenditure is on the payroll.

Thats novel, you've just bastardised what they said for your own ends.

 

The majority of all BW expenditure on the general maintenance and major repairs of the canal infrastructure includes VAT.

They're quite clearly referring to expenditure on canal infrastructure and not other aspects of the payroll.

[T.A]

I think the main thrust of this thread is should the license cost be zero rated, it does appear that in general license costs are zero rated, therefore again it comes down to how independant are BW to argue on it's customers behalf this point. Unfotunately companies hived off by the government in monoply situations are never clearly independant companies!

[Dominic M]

I agree with the principal and understand it but what does BW supply? I don’t think that a licence could be considered goods or a service. Of course if it is then there would be a contract and the supplies or services would be defined in some respect and they don’t seem to be. The crucial point in this statement is in the last sentence “where the law requires it”, it is my contention that in the case of a licence, the law does not require it!

I think the main thrust of this thread is should the license cost be zero rated, it does appear that in general license costs are zero rated, therefore again it comes down to how independant are BW to argue on it's customers behalf this point. Unfotunately companies hived off by the government in monoply situations are never clearly independant companies!

That is not HMRC's interpretation I'm afraid. A licence provided by an organisation that is VAT registered is a taxable supply; as with other licences such as a PRS and PPL licences, which most shops, pubs and clubs are obliged to purchase for example. It would be great if BW licences did not attract VAT, but that could be said about many things. Given that we have VAT as method of taxation throughout the EU I cannot see any rational argument for exempting or zero rating boat licences. They cannot be described as essential items, such as food, healthcare, education etc.

 

Somebody said they would like to see the exemption that applies to the Envitonment Agency. I have unearthed it in the past, but can't find it now. However, it is a specific clause in the legislation that applies to the EA and other government departments. I believe BW sought the same exemption, but they were refused it, so one can't say that they didn't try.

[GUMPY]

Somebody said they would like to see the exemption that applies to the Envitonment Agency. I have unearthed it in the past, but can't find it now. However, it is a specific clause in the legislation that applies to the EA and other government departments. I believe BW sought the same exemption, but they were refused it, so one can't say that they didn't try.

 

Its not an exemption!

EA do not issue licences they are registrations. A totally different beast. they cannot issue a licence as they do not own the land underneath the river.....................

BW also issue river registrations, it would be interesting to see if there is VAT on them as they dont own the beds of the rivers either.

 

Julian