Revenue & Customs Brief 30/08

VAT: partial exemption – launch of consultation

This Revenue and Customs Brief article announces the launch of a consultation on ideas to simplify the VAT partial exemption rules to reduce compliance costs for businesses. The consultation invites comments and suggestions on the three partial exemption areas identified as simplification priorities by businesses:

• standard method
• de minimis rules
• Capital Goods Scheme (CGS)

It also invites comments on possibly combining partial exemption and business/non-business calculations.

Partly exempt businesses and their representatives are encouraged to participate to help cut compliance costs. Further information on partial exemption is available in Public Notice 706 Partial Exemption.

Background

VAT on costs relating to taxable supplies is recoverable, whereas VAT relating to exempt supplies is normally irrecoverable. A business that incurs VAT on costs relating to taxable and exempt supplies is partly exempt and must apply the partial exemption rules to calculate how much VAT it can recover.

There are around 140,000 partly exempt businesses including financial service providers, property companies, educational organisations, charities, gaming operators and undertakers. Around 120,000 of these, mainly smaller-sized businesses, operate the standard method, which is a simple turnover-based calculation set out in law.

Around 100,000 small partly exempt businesses benefit from being able to recover VAT relating to exempt supplies that is deemed insignificant under the de minimis rules. This is meant to relieve small businesses of the burden of restricting VAT relating to exempt supplies.

Some expenditure on capital items, mainly relating to land and buildings, falls within the CGS. This requires businesses to review the extent to which capital items are used in making taxable supplies for a period of up to ten years, making adjustments to previously recovered VAT where necessary. Most large businesses incur expenditure on capital items.

Consultation

The consultation was launched on 19 June with publication of the consultation on ideas to simplify the VAT partial exemption rules. Businesses and representative bodies are invited to suggest ways to simplify partial exemption and comment on a number of ideas for simplification. Responses from smaller-sized businesses and their representatives that regularly perform partial exemption calculations are particularly encouraged as they are likely to be affected most and have most to contribute. With this in mind, technical and legal content has been kept to a minimum. The consultation will end on 30 September 2008.

Further information

If you have any queries please contact Patrick Wilson on 020 7147 0595 or by email Patrick Wilson.

Issued 19 June 2008