For whom does VAT Toll?
Well the good news is that it doesn’t now apply to any tolls paid by commuters – business or personal – crossing on the Severn Bridges from the 8th January 2018.
All Tolls had, up to that point, included VAT at the Standard rate in force in the UK therefore within the £6.70 you were paying to cross the bridge £1.10 (with a 20% VAT rate) of that charge went to HMRC. This covered all tolls charged by the commercial company that was responsible for the running of the Bridges. VAT is a tax that impacts on business activities undertaken in the UK and if a business charges for the right to cross its bridge then that is regarded as a business activity and it needs to work out what VAT treatment applies to that charge.
In the case of Tolls, the VAT treatment is Standard rated but remember VAT only apples to supplies made in the “course or furtherance of business”. Therefore, if a government department or local authority undertakes an activity which is its statutory duty to deliver – an NHS Trust providing NHS Healthcare for example or the Department of Transport delivering Road schemes then it is NOT undertaking business supplies which fall under the VAT regime. It may well set a specific charge but that doesn’t make it “business income”.
As the Bridges have now moved to be the responsibility of Highways England then this Agency – which had formerly been an Executive Agency of the Department of Transport but became a strategic highways company from 1 April 2015 – is still regarded as acting in a “Statutory” and therefore “non-business” capacity in maintaining the Bridges. Therefore, the charges which it makes to cross the Bridges do not attract VAT.
Technically they could have left the charges at the £6.70 level and have retained the extra income as profit, however, I’m sure many would agree that this would have been a “brave” (in the words of Sir Humphrey) political decision!
Because of the way in which VAT works an organisation can normally only recover VAT it incurs on its costs where it can prove that those VAT amounts are used to support not just its business activities but that those business activities generate Taxable income from the VAT perspective.
As a business incurring the toll costs it is clearly now very important to inform your Accounts Payable teams that they should no longer be deducting VAT off toll charges paid for travel on and after the 8th January. To deduct VAT where no VAT has been incurred would create an over claim of VAT which would be an error.
For an entity that only has non-business activities – perhaps it’s a charity that runs off donations and grants or it’s the Highways England entity generating only non-business tolls income, then VAT is a real cost potentially. That entity is not engaged in a taxable business activity to justify VAT recovery.
However, before readers start to worry that the VAT Highways England will incur on buying in goods and services to continue to run the Bridges will be an added cost to that organisation, we’d need to get an insight into the way in which VAT works in Government Departments.
Clearly a business needs to charge VAT on its supplies to a department that are standard rated and that VAT would be an added cost if it cannot be recovered by that department. However, recognising that facing a VAT charge from contracting out supplies to businesses rather than delivering the same services from inhouse employees, the Treasury instigated in the 1980’s the Contracted Out Services VAT rules for Government Departments to access.
This lists, currently, 75 types of services which – if a department contracts out to a third party to supply AND as a result VAT is incurred on the costs then – as long as the service is one of the 75 listed and would formerly have been undertaken in house, the department or agency can reclaim the VAT it’s been charged. This is irrespective of the fact that the costs will not relate to any business supply – let alone any taxable business supply.
Who said therefore that VAT is a simple tax! – even the reduction in the Severn Bridge Tolls unlocks a plethora of issues in the way that VAT is applied in the UK across business and non-business organisations – charities, public and private sector. For us at Centurion VAT that’s what makes it such an interesting area of tax to support our clients on – and still does as we enter our 20th year in business.
There’ll be lots more interesting issues to consider in the VAT sphere in future as well; Making Tax Digital and of course Brexit!
Let’s enjoy the VAT reduction impact on the Severn Tolls for the moment though – at least it helps to re-enforce that Wales is an economy and a country “open for business”.
©Liz Maher Director Centurion VAT Specialists Ltd
Tel: 01633 415390