VAT status on gaming machines could change from July

11/04/2012

The industry has been dealt another blow post Budget with the unexpected news that the Treasury plans to start changing the VAT status of machines much earlier than was originally thought.

Manufacturers were hoping for a final boost in sales before machines became VAT exempt in February 2012 and there was even talk of a UK exhibition timed for October, which would have been a perfect opportunity for operators to buy machines and claim back the VAT before the February deadline.

However, it has since come to light that the Government appears to want to change the VAT status on machines from July this year, when the Budget gets Royal Assent. This would mean that during the period from July 17 to February next year that VAT claimable will only be in relation to the amount of time the machine is in operation before it becomes completely VAT exempt.

It is important to point out that at the moment the final situation is still far from clear, as BACTA pointed out in a letter to its members:

“The VAT position for recovery of input VAT from Royal Assent will impact on some supplies where the expense relates to exempt supplies after 1st February e.g. rent of premises but please note HMRC is not comprehensive in their advice, eg they do not refer to machine purchases. The only reference to the purchase of machines is to a pub group that is buying 200 machines. Firstly pub chains do not buy gaming machines.  Pub managers do not pay domestic rent and HMRC appear to be confused, so we need to give them a number of scenarios and ensure there is a common understanding.”

Despite this, some in the manufacturing fraternity are pretty clear where this appears to be heading. “This is a strategic and malicious way for the Government to get at the industry. It will negatively affect sales and it will pass an extra burden onto operators to keep even more detailed accounts,” says one.

The full text of HMRC’s letter on the subject is copied below:

Machine Games Duty (MGD):  VAT information note

Further to the note sent to working group members last Friday, this note expands on the key milestones and VAT implications MGD registrable businesses will need to consider ahead of the introduction of MGD.  I would re-iterate that a VAT-registered business becomes partly exempt when it makes, or intends to make, both taxable and exempt supplies and incur input tax that relates to both kinds of supply.

There are two key dates that should be noted –

  • The date the Finance Bill 2012 receives Royal Assent (last year it was 19 July). At this time the legislation relating to MGD will have been formally agreed so businesses will know with certainty how they will be affected and be able to ascertain whether they will be making VAT-exempt supplies from Feb 2013. If they will be, then when input tax is incurred that relates to both taxable and exempt supplies, a business will become partly exempt and will need to undertake quarterly and annual calculations as described in Notice 706 to determine the amount of input tax that can be claimed.
  • 1st Feb 2013 which is when MGD is being introduced when supplies subject to the new tax become exempt from VAT, at which point, if they haven’t already become partly exempt, businesses will become so when they incur input tax relating to both taxable and exempt supplies.

At the time of becoming partly exempt, although VAT registered businesses can continue to recover VAT on purchases which relate to taxable supplies made, or intended to be made, in principle they will not be able to recover VAT that relates to any exempt supplies, unless below certain limits. VAT will also be incurred on purchases which relate to both taxable and exempt supplies, for example utility bills, property rental etc. This VAT is known as residual input tax and partly exempt businesses must undertake calculations which work out how much input tax they may recover as a business can only recover the input tax to the extent that the purchases are used to make taxable supplies. The calculation requires the direct attribution of input tax to either taxable or exempt supplies and the apportionment of residual input tax and is undertaken quarterly and also on an annual basis – more detail is available in Notice 706.

In the annual adjustment, businesses redo all aspects of PE, including direct attribution so, for example, a cost that was originally attributed to taxable supplies when it was incurred, because it was incurred prior to Royal Assent, but which was used in making exempt supplies after 1 Feb 2013, will need to be re-attributed to the residual category in the annual adjustment.

Some examples of typical situations that may arise -

  • A business that is not partly exempt prior to the liability change pays for a yearly lease on a gaming machine in May 2012.  As the business is fully taxable when it pays the cost, input tax will be recoverable in full on its VAT return. Although the machine will be used for exempt gaming for Feb, March and April 2013 under this lease supply there is no need to adjust the input tax deduction as at the time of incurring the cost, there was no intention to make exempt supplies.
  • The same business pays for a yearly lease in October 2012 after Royal Assent has (for the purposes of this example) been given to the Finance Act in July 2012.  This makes the business partly exempt from 1 October 2012, and makes the input tax on the lease residual.  However, because the business makes no exempt supplies in their December VAT return period, it is able to recover all residual input tax.  In the annual adjustment the exempt gaming machine supplies made in Feb and March 2012 mean the business’ PE recovery rate for their longer period (1 Oct 2012 to 31 March 2013) is 97%, so some input tax on the lease and other overhead costs incurred late in the year is attributed to exempt supplies.  However they are de-minimis for the longer period and can recover all of their input tax.
  • A chain of pubs buys 200 gaming machines in June 2012.  As Royal assent has not been given by then they treat the cost as taxable on their June VAT return and claim all of the VAT.  They have always been partly exempt because of domestic rents charged to pub managers.  In their annual adjustment for the year to March 2013 they have to re-attribute the input tax to residual.  This leads to an amount of exempt input tax for the year in excess of the de-minimis limits so they have to adjust the initial input tax claimed.  They are on the standard method so must also consider whether the standard method override requires a further adjustment.

It is strongly suggested that all businesses that will be liable for MGD from 1st February 2013  read HMRC Notice 706 (Partial Exemption) and, if they consider it appropriate, seek further advice to clarify the potential impact on their business

 

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