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Partial Exemption

HMRC have brought in options for the Trader to save compliance cost of carrying out full blown partial exemption calculations for each VAT period. The most recent changes are available for periods commencing on or after 1^st April 2010 and these build on similar compliance cost savings options introduced from 1^stApril 2009 relating to the standard method.

Before changes of this type are implemented HMRC calculates costs or savings associated with the use of the new measures in justification of the changes. Unfortunately not every eventuality can be costed and whilst HMRC do say that these new measures will not work very well in changing circumstances I fear that there will be many who will take advantage of these changes for apparent compliance cost savings and possibly cash flow benefits who will find that it all goes wrong when the annual calculations are carried out.

As mentioned above these changes are optional and for those whose circumstances change from time to time and who need to know what the cost impact will be and who have systems set up for VAT period and ongoing review best advice is to continue as you are.

The optional changes implemented from 1^st April 2009:

In Year Provisional Recovery Rate (Apply last year's recoverable percentage)

1. Use the percentage of recoverable input tax as demonstrated by the last annual calculation for the current year's returns.

2. Instead of carrying out a detailed calculation for each current year period use last year's percentage for recoverable input tax.

3. Complete annual calculation in usual way and then use that recoverable percentage for the next year's returns.

The potential problems here relate to change. For example members sports clubs and associations who carry out refurbishments from time to time would probably get a nasty shock after the annual calculation has been carried out if this option was taken without the back up for management purposes of the full calculation per period with an ongoing review.

Early Annual Adjustment

Instead of having to wait until the first quarter of the new year to reflect the previous year's annual adjustment in the returns the choice to deal with the adjustments in the last return period of the year is available. A welcome change for those whose annual adjustment figures reduce VAT liability.

The optional changes implemented from 1^st April 2010:

 

Simpler Tests (de minimis tests)

The new tests, applied on a VAT return period basis, are supplemental to the Current Test. If any test is passed it is not necessary to look at the other two tests.

1. Test 1 - If total input tax is less than £625 per month on average and exempt supplies are less than 50% of all supplies go no further – treatment as fully taxable.

2. If Test 1 is failed look at Test 2 – If total input tax less input tax directly attributable to taxable supplies is less than £625 per month on average and exempt supplies are less than 50% of all supplies go no further – treatment as fully taxable.

3. Current Test – Full calculation as before.

All this does is give recognition to practice that has been applied for some time. An annual test is still required.

New Annual Test

Where the last annual de minimis test was passed VAT returns for the current year can be completed on a fully taxable basis and any over-claims of input tax adjusted on the annual test and paid back. There are some conditions for this but essentially management of most organisations who might be able to take advantage of this would prefer to have a full calculation each period to provide information for planning for the impact of the annual adjustment.

Conclusion/Comment

These changes do not appear to be helpful except in justifying that which makes common sense i.e. Simplified Test 1 as above. Otherwise, although carrying some appropriate comment the implementation of these changes potentially encourage business and organisations to move away from tried and tested systems where full information and updated year to date figures are essential for management to understand and plan ahead; fundamental for many types of organisation caught by the partial exemption rules such as sports clubs and charitable organisations which type of entities are by their very nature exposed to lack of consistency issues associated with constitutional and management committee changes