The following is our analysis of the VAT measures announced in the Budget 2004, and how they will affect local authorities:

The Budget - 17th March 2004

A very quiet Budget in terms of VAT measures affecting local authorities.

The 5% VAT rate applying to the installation of specific energy saving materials will be extended, from 1 June 2004, to include ground source heat pumps.

Ground source heat pumps (GSHPs) are electrically powered systems that tap the stored energy of the earth. These systems use the earth's relatively constant temperature to provide heating, cooling, and hot water for homes and commercial buildings.

Pre-Budget report - 10th December 2003

There were an unusually high number of VAT measures introduced in the pre-budget report. Most of these were aimed at combating VAT avoidance and, thankfully, will have little or no impact on local authorities.

Measures introduced include changes in the Bad Debt Relief rules to block a current loophole whereby a VAT advantage can be gained by assigning bad debts to associated parties. The Chancellor also announced proposals to change the eligibility rules for joining VAT groups, again this is aimed at tackling avoidance.

New rules on Partial Exemption special methods will be introduced from January 2004 aimed at speeding up the process of introducing new methods where Customs formally withdraw an existing method where they do not perceive it to be 'fair and reasonable'. Customs have identified that some businesses are deliberately slow in agreeing a new special method in order to continue to benefit for as long as possible from the existing method. The new rules will allow Customs to require that the business 'corrects' the unfair benefit of the existing method with immediate effect, until a new agreed method is put into place.

While there are no immediate implications for local authorities, one can imagine that Customs may wish to adopt a similar approach where they feel that a local authority has a section 33 recovery method that is not fair and reasonable.