Independent VAT Consultant
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HMRC seeks views on two VAT schemes

26th Jul 2019
Independent VAT Consultant
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Neil Warren is concerned that HMRC’s review of partial exemption and the capital goods scheme could lead to ‘complification’ rather than simplification.

Here is a question for you: has there ever been a simplification measure in the last 30 years in the VAT world that has actually simplified anything?

In my view the opposite is true: complification is usually the outcome, which is good news for VAT consultants but very few others.

HMRC has announced another simplification exercise, this time for partial exemption and the capital goods scheme. I suspect that this will be another wasted opportunity to make life easier for us all.

The consultation

The consultation considers three main subjects:

Partial exemption special methods

This is any method other than the standard method – the latter being based on the ratio of taxable to taxable and exempt sales in a period. Special methods currently require HMRC approval before they can be adopted and the business owner has to certify that the method gives a fair and reasonable result in terms of input tax recovery.

Partial exemption de minimis limits

Where a business has a small amount of exempt activity, it can still reclaim input tax on exempt related costs if the input tax is below certain limits. There are three different tests, the main one being that exempt input tax must be both less than £625 per month on average and also less than 50% of total input tax.

Capital goods scheme

This applies where the business has purchased certain capital items exceeded £250,000, excluding VAT, and requires that input tax must be adjusted over 10 years.

There is a five-year adjustment period for the input tax applying to the purchase of computers, aeroplanes, ships, boats and other vessels costing more than £50,000, (VAT Notice 706/2, para 3.1).

The capital goods scheme recognises different use between taxable and exempt or non-business activities over the adjustment period.

The closing date for comments on this consultation is 26 September 2019. You can add your views by emails to [email protected] or comment below and we will submit a response on behalf of AccountingWEB readers.

My concerns

My personal view is the best way of simplifying something is to have fewer rules than before you started and not more.

Let me share two examples:

Omnishambles Budget 

In his famous 2012 Budget, the then Chancellor George Osbourne announced plans to simplify the rules on VAT and caravans between the standard and zero rates.

It all got very complicated and the end result was a new VAT rate of 5% for some caravan sizes. Two VAT rates moving to three is not simplification!

Partial exemption

The last simplification exercise for partial exemption in 2010 introduced two additional de-minimis tests, known as Test 1 and Test 2 (VAT Notice 706, section 11).

This was always likely to be a waste of time because most people are still only aware of the main test I quoted above. One test changed to three tests is not simplification.

Possible changes

HMRC has invited comments on each of the three categories, with a number of suggestions:

  • Should the HMRC approval process be abolished for partial exemption special methods?
  • Should the de-minimis thresholds be increased for the first time since 1994?
  • Should the de-minimis rules be removed completely ie all exempt input tax needs to be blocked irrespective of the amount?
  • Should the £250,000 and £50,000 thresholds for the capital goods scheme be increased to reflect inflation (particularly for properties), as those thresholds haven’t been changed since 1990?
  • Should there be a different threshold for spending on a property (alteration, extension, annexes, refurbishments) to that of buying a building – at the moment, both thresholds are £250,000?

Suggestions

Sticking with my less, not more principle, here are my three personal recommendations:

  • Abolish the three partial exemption de minimis tests and just have a simple rule that if exempt input tax is less than £625 per month on average, it can be claimed;
  • Take out computers from the capital goods scheme;
  • Have the same adjustment period for property and non-property expenditure – five years in both cases.

I suspect that the idea of simplification will be superseded by a key phrase in HMRC’s consultation document that any changes must ensure that “VAT continues to be collected in an efficient way” – ie impacts on revenue are probably more important than the concept of complification… sorry, simplification.

Replies (3)

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By mickeyparish
29th Jul 2019 10:09

Hello I'm not totally clear about the starting position on " exempt input tax ". Is this notional VAT on "exempt supplies " eg books and childrens' clothes, food groceries etc, or is it notional tax on purchases from suppliers of taxable goods and services who are exempt from charging VAt due to being below the VAT threshhold ?

Apologies for being a bit dense !

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By Wilson Philips
29th Jul 2019 11:32

The term "exempt input tax" is I suppose a little confusing since it has nothing to do with the status of the purchases (BTW, groceries, kids' clothing etc are largely zero-rated, which is not the same thing as exempt).

No, "exempt input tax" refers to input VAT incurred, at whatever rate, on purchases that relate to exempt supplies by the trader.

Example - someone owns and rents out 2 properties: a dwelling and an office (which has been opted to tax). He refurbishes both, at a cost of £10,000 plus £2,000 VAT each. The £2,000 VAT in respect of the dwelling is "exempt input tax" because the rental income from that property is exempt.

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By annashetty
31st Jul 2019 03:45

I have learned in this area, so understand the difficulty in it, the article is useful. driving directions

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