The following sets out the VAT measures announced in the Budget 2005 of relevance to local authorities:

The Budget - 16th March 2005

See also Customs and Excise budget notes.

Childcare and Welfare

From 1st April 2005 the local authority provision of certain services, such as childcare and welfare, will be reclassified as non-business rather than exempt activity for VAT purposes. The effect of this measure is to remove the present restriction on VAT refunded to local authorities when they provide these services. The precise scope of the services covered by this measure will be announced shortly, but in general, only services of a social nature where local authorities have a special duty to ensure provision will be affected.

Comment: This is clearly a welcome measure as the services that are reclassified as non-business will no longer impact on the partial exemption calculation. Much will depend however on the scope of the services that the measure will cover.

Unjust Enrichment

A defence of unjust enrichment is available to Customs in most cases when an incorrect VAT charge has been passed on to customers. This means that Customs can refuse to meet claims for repayment where repayment would unjustly enrich the claimant. Previously, this defence applied only to claims where businesses had overpaid VAT. This measure extends the use of the defence by Customs to all claims. It will no longer matter whether a claimant is in a net payment or repayment position on individual VAT returns.

Comment: This looks very much like a pre-emptive damage limitation exercise in case Customs ultimately lose the Isle of Wight car parking case. On a positive note, it will force Customs to consider the issue of unjust enrichment properly, rather using the question of whether or not a local authority is in a repayment position as a smoke screen or delaying tactic as has happened recently in respect of library reclaims.

Pre-Budget report - 2nd December 2004

View the full report

In this report, the Chancellor re-affirmed his policy of combating VAT avoidance and improving compliance.

The integration of HM Customs and Excise and the Inland Revenue, and the strengthened capacity for tax policy development at HM Treasury, represent a natural next step in developing a strategic approach to improving compliance. A modern organisation, using modern compliance tools, will be well placed to rise to the continuing challenge from non-compliance. This approach will be based on two key principles of fairness and customer focus, ensuring activities are effectively tailored to the needs and behaviours of different customers.

A key part of this approach will be to encourage customers to comply voluntarily as the best way of improving compliance. Reducing the costs faced by compliant taxpayers will be a priority. However, the Government is also determined to take vigorous action against those who choose not to comply. The compliant majority should not pay the price for others who deliberately flout their obligations to pay a fair share. Intensifying efforts to combat avoidance and fraud will therefore also be a central feature of the approach.

Tax avoidance schemes are often sophisticated and aggressive in nature and thrive in an environment of secrecy. Such schemes represent an unacceptable attack on the integrity of the tax system. In Budget 2004, the Government introduced disclosure rules to tackle tax avoidance schemes for both direct taxes and VAT. These rules are already achieving their purpose of allowing earlier and more targeted action against avoidance schemes. The Government welcomes the generally positive reaction of the business community to the disclosure rules and intends to continue to use disclosures received to counter avoidance and to ensure improved design of tax policy in the future.

See also Budget 2004.