Explanatory note

These Regulations, which come into force on 1st April 2009, amend Parts V (accounting, payment and records), VIIA (flat-rate scheme for small businesses), XV (adjustments to the deduction of input tax on capital items) and XIX (bad debt relief) of the Value Added Tax Regulations 1995 (S.I. 1995/2518).

Regulation 3 amends regulation 29 (claims for input tax). It provides that a taxable person cannot make a claim for input tax until he holds the evidence which is required to substantiate that claim and makes a consequential amendment to the capping provisions contained in that regulation as well as clarifying that a taxable person can only deduct a specific amount of input tax once. It also extends the time limit for making claims from 3 years to 4 years, but not retrospectively (i.e. it does not allow claims that are already out of time to be brought back within the time limit). The effect is that the extended time limit would not apply to a situation where the return for the first prescribed accounting period in which the person was entitled to claim the input tax was required to be made on or before 31st March 2006.

Regulation 4 amends regulation 34 (correction of errors) which allows a taxable person to correct specified overstatements or understatements of VAT due on a later VAT return. It extends the time limit for making such corrections from 3 years to 4 years, but not retrospectively (i.e. it does not allow corrections that are already out of time to be brought back within the time limit). The effect is that the extended time limit would not apply to a situation where the prescribed accounting period for which the return was made or required to be made ended on or before 31st March 2006. It also amends the figure specified in regulation 34.

Regulation 5 amends regulation 38 (adjustments in the course of business). It removes the existing time limit to allow adjustments to be made where an increase or decrease in consideration occurs more than three years after the end of the prescribed accounting period in which the original supply took place and clarifies the taxable persons who are required to make adjustments under that regulation.

Regulation 6 amends regulation 55L (admission to the flat rate scheme) to simplify the flat-rate scheme for small businesses by removing the joining test which requires a business to check that its total income is less than £187,500. The other joining test which requires a business to check that the value of its taxable supplies in the year will not exceed £150,000 is retained.

Regulation 7 amends regulation 55M (withdrawal from the flat rate scheme) to clarify that the “income” of a business should be calculated in relation to the leaving test for the flat rate scheme using the same method that the business used to calculate its turnover whilst using the flat rate scheme under regulation 55G (determining relevant turnover).

Regulation 8 amends the time limits in regulation 111 (exceptional claims for VAT relief) from 3 years to 4 years but not retrospectively (i.e. it does not allow claims that are already out of time to be brought back within the time limit). It applies to claims for pre-registration input tax incurred on goods and to post-deregistration input tax incurred on services. In the case of pre-registration input tax, the effect is that: (i) where the relevant person was, or was required to be, registered on or before 1st April 2009, no VAT may be treated as if it were input tax under regulation 111(1) in respect of goods which were supplied to, or imported or acquired by him more than 3 years before the date with effect from which he was, or was required to be, registered; and (ii) where the relevant person was or was required to be registered on or before 31 March 2010 and (i) (above) does not apply, no VAT may be treated as if it were input tax under regulation 111(1) in respect of goods which were supplied to, or imported or acquired by him on or before 31 March 2006. In the case of post-deregistration input tax, the effect is that the extended time limit would not apply where the claim was in relation to a supply of services made on or before 31st March 2006.

Regulation 9 amends regulation 115 (input tax on capital goods: method of adjustment) which deals with input tax adjustments required as a result of changes in the extent to which a capital item is used. Where the specified return is not used, another return may be used subject to specified conditions. It extends the time limit for using another return from 3 years to 4 years, but not retrospectively (i.e. it does not allow adjustments that are already out of time to be brought back within the time limit).

Regulation 10 amends regulation 165A (bad debt relief: time within which a claim must be made). It extends the time limit for claims from 3 years and 6 months to 4 years and 6 months, but not retrospectively (i.e. it does not allow claims that are already out of time to be brought back within the time limit). The effect is that there is no extension of the entitlement to a refund where the date specified in regulation 165A falls on or before 30^th September 2005.

An Impact Assessment has not been produced for regulations 3 (other than the time limit changes), 5, 6 and 7 of this instrument as no impact on the private or voluntary sectors is foreseen.

An Impact Assessment covering the changes made by regulations 3 (time limits), 4, 8, 9 and 10 was published alongside the 2008 Finance Bill, and is available from HMRC’s website at www.hmrc.gov.uk/ria/compliance-checks.pdf.