H.M. TREASURY Notes on Clauses

CLAUSE 14: VALUE ADDED TAX (PENALTIES FOR INCORRECT CERTIFICATES)

INTRODUCTION

1. This clause provides for a penalty to be imposed on customers who give an incorrect certificate to claim eligibility for fuel and power supplies at the reduced rate of VAT. It also tidies up the penalty provisions for incorrect zero rate certificates.

DETAILS OF THE CLAUSE

2. Subsection (1) provides for the substitution of new subsections (1), (1A) and (2), for the existing subsections (1) and (2) of section 62 of the Value Added Tax Act 1994. Currently, section 62 provides for a penalty where a customer gives or prepares an incorrect certificate claiming that supplies to him qualify for the zero rate of VAT. This subsection of the clause has the effect of removing an incorrect reference to fuel and power legislation, ie Group 7 of Schedule 5 to the Value Added Tax Act 1983, in which fuel and power was zero rated. Instead, it extends the penalty provisions to include incorrect certificates claiming the reduced rate of VAT on fuel and power supplies, provided for in paragraph 1 of Schedule A1 to the 1994 Act. It also has the effect of removing references to transitional relief following the abolition of zero rating for the construction of new buildings, where the relief is no longer available. Finally, the existing subsection (1) of section 62 is split into subsections (1) and (1A) so that the new subsection (1) deals more conveniently with incorrect certificates that are 'given' and subsection (1A) deals with incorrect certificates that are 'prepared', ie for the purposes of section 18B(1)(d) fiscal warehousing requirements.

3. Subsection (2) provides that the amendments will take effect in respect of all certificates given or prepared from Royal Assent.

BACKGROUND

4. Certain supplies can be chargeable to VAT at the zero rate and some other supplies can be chargeable at the reduced rate provided, in each case, they are put to qualifying use. Often, the customer is better placed than the supplier to confirm the qualifying use. Provided the supplier holds a certificate signed by the customer that such supplies are eligible for the zero or, as the case may be, the reduced rate then the supplier, who has taken all reasonable steps to check the validity of the declaration, will not be held liable to account for any underdeclaration of VAT if the certificate is found subsequently to be incorrect. Instead, section 62 of the Value Added Tax Act 1994 provides that the customer shall be liable to a penalty equal to the amount of VAT that was not charged. Such arrangements were in force for the zero rate of VAT on certain supplies of land and property and of fuel and power and on certain supplies in a fiscal warehousing regime.

5. From 1994, the reduced rate of VAT has applied to fuel and power for domestic or charity non-business use. The penalty for an incorrect certificate claiming the zero rate for fuel and power supplies is now replaced by a penalty for incorrect certificates claiming the reduced rate of VAT for fuel and power supplies.

6. In 1989, the construction of many buildings became standard rated for the first time. A transitional arrangement, allowing zero rating of certain supplies by way of construction, was also subject to the certificate regime and a penalty for incorrect certificates. These transitional arrangements expired some years ago and the penalty associated with these transitional arrangements can now be removed. A certificate regime continues for the construction of certain zero rated residential and charity buildings, as does the associated penalty.

7. The extension of the penalty regime to reduced rate certificates for fuel and power is a fairness measure which deters people gaining a tax advantage by giving incorrect certificates. The other minor changes are designed to keep the provision up-to-date and relevant.