§ Mr. Tim Smith
asked the Chancellor of the Exchequer what representations have been received in response to a consultation document issued by Customs and Excise on 7 August entitled, "VAT: Input Tax: Origin and Scope of the Right to Deduct"; and if he will make a statement.
§ 9. Mr. Lawson
Over 100 responses were received in writing and 23 meetings have been held with trade and professional bodies. In the light of these, I propose to introduce the following measures:
Right to Deduct Input Tax.—The right to deduct the input tax as expressed in section 14 and 15 of the Value Added 741W Tax Act 1983 is expressed in wider terms than in the EC Sixth Directive on VAT and allows businesses to recover input tax not related to the making of taxable supplies. The right to deduct will be restricted to only such input tax as is incurred in the making of taxable supplies. An exception would be required to give effect to article 17.3 of the Sixth Directive in favour of input tax incurred in the United Kingdom in respect of certain overseas and other non-taxable transactions.
VAT Group Registrations—
- (a) Power to Restrict Grouping. I do not propose to introduce new legal provisions restricting the present rights of companies to form VAT groups or to add or remove companies from existing groups. But Customs and Excise will in future exercise more strictly its power to refuse applications for group treatment where this appears necessary for the protection of the revenue.
- (b) Transfer of Going Concerns. Where a business or its assets is transferred as a going concern to a VAT group which is or becomes partly exempt during the tax year in which the transfer takes place, the transaction will be treated as a supply to and by the group. The group would be responsible for accounting for the tax due.
Valuation of Exempt Supplies—The provision of the Value Added Tax Act 1983 governing valuation of certain supplies not made in open market conditions at present apply only to taxable supplies. To prevent input tax deduction calculations being distorted by undervaluation of exempt supplies, these provisions will be extended to exempt supplies.
1–3. Where the above proposals require legislation, I intend to include this in the 1987 Budget and Finance Bill, to take effect from 1 April 1987.
Partial Exemption "de minimis" Rules—The present partial exemption rules are open to serious distortion because they require proportional calculations to relate to the outputs of a business and not to its inputs. To protect against such distortions, it is necessary to prescribe that, as a normal rule, all calculations should relate directly to the input tax, including those calculations which show whether the business may reclaim all its input tax on de minimis grounds. In response to representations about the possible complexities for businesses, it is proposed that these rules should be as generous and simple as possible, so that a business can readily establish whther it is eligible for "de minimis" treatment, while not open to manipulation and substantial revenue loss.
The partial exemption rules will be amended to provide as follows:
(a) Where a taxable person's input tax attributable to exempt supplies amounts to less than any of the following:
all such input tax for the relevant period may be attributed to taxable supplies. For group registrations, the provisions will apply to the group as a whole.
- (i) £100 per month on average;
- (ii) Both £250 per month on average and 50 per cent. of all his input tax;
- (iii) Both £500 per month on average and 25 per cent. of all his input tax;
(b) For the purpose of the above calculations, certain exempt supplies may be ignored. These supplies will be prescribed by regulation and will include;
- deposit interest;
- rent (where the input tax directly attributable to lettings is less than £1,000 a year);
- insurance commissions;
- mortgage commissions;
- assignment of debts.
Businesses will not be allowed to take advantage of these simplification measures if they are within the financial sector or within other categories, which will be prescribed, which make these supplies as a significant part of their business.
These measures will have the effect of substantially reducing the numbers of businesses needing to do calculations in order to establish whether they fall within the partial exemption "de minimis" rules.742W
Partial Exemption Standard Method. Where the "de minimis" rules do not apply, the taxable person must apportion his input tax between that which relates to taxable and that which relates to exempt supplies. The rules for attribution of input tax will be revised as follows:
- (a) Input tax must be identified and attributed to the greatest possible extent, as between taxable and exempt supplies and any other activity and only that tax attributable to taxable supplies may be deducted.
- (b) The remaining input tax which cannot be directly attributed is to be apportioned by reference to the use made of the goods and services to which it relates. Customs and Excise will accept any method of calculation which produces a fair and reasonable apportionment between the taxable and exempt activities which these goods and services (or the largest conveniently ascertainable part of them) are used to support. An apportionment which attributes this remaining input tax in the same proportion as the input tax directly attributed under (i) will always be accepted. But in making such an apportionment, no account is to be taken of input tax on goods supplied in the same state, on supplies by agents under section 32(4) of the Act, on supplies which are subject to specific restriction, e.g. motor cars, or on supplies of transfers of going concerns treated as taxable under paragraph 2(b) above.
- (c) Customs and Excise would also be enabled to allow the use of a method other than those specified above. This would include in appropriate cases a special method based on the ratio of the taxable supplies made by a business to its total supplies.
Taxable persons who have existing approval to operate a special method may continue to operate that method. Agreements negotiated between representative trade bodies and Customs and Excise would also continue unchanged. These approvals and agreements remain subject to review in the normal way. Taxable persons operating the existing standard method or becoming partly exempt because of changes in the "de minimis" rules will have to adopt the new standard method at (i) and (ii) above. If this is impractical or it is thought that it will not produce an accurate or lair result, Customs and Excise will consider allowing an appropriate special method. Individual businesses should apply to their local office; representative trade bodies should approach Customs and Excise headquarters.
Minor Amendments to the Partial Exemption Regulations:—The following minor amendments will also be made:
- (a) Regulation 29(5). Amend to read: "The Commissioners may approve or direct different provisions for different circumstances and in particular may approve or direct,…
- (b) Regulation 32(a). Delete "an exempt supply" and replace with "a supply".
- (c) Regulation 32(e). Delete "exempt".
4–6. These changes will be implemented by revised regulations made by the Commissioners of Customs and Excise and will come into operation from 1 April 1987. Drafts of the regulations will be circulated as soon as possible to those bodies which expressed an interest in seeing the text during the consultation. I will place copies in the Library of the House. The regulations are subject to the negative parliamentary procedure.
Appeals. There is at present no specific right of appeal to the VAT Tribunal regarding the use of partial exemption methods. Such a right will be proposed in the 1987 Finance Bill.
Deduction of Input Tax on Capital Goods. The EC Sixth Directive, Article 20.2, requires the input tax on capital goods to be adjusted annually over a period of five years. The United Kingdom has not implemented this measure, even though it would be desirable for the protection of the revenue. It will now be introduced (by a further amendment to the partial exemption regulations) but with effect from 1 April 1988.
Other Matters. Concern has been expressed that the revised partial exemption rules could have an adverse and distortive effect on recovery of input tax, in respect of capital 743W issues, including Eurobonds. Consideration is being given to exempting from VAT the supply of services in relation to such issues.
The revenue effect of all these changes is estimated to be an increased yield of VAT in I987–88 of £300 million.
§ Mr. Tim Smith
asked the Chancellor of the Exchequer how many responses Her Majesty's Customs and Excise have received to the consultative document "VAT Input Tax: Origin and Scope of the Right to Deduct"; how many of the responses supported the proposals set out in the consultation document and how many opposed them; and if he will arrange for copies of the responses to be placed in the Library.
§ Mr. Brooke
There were 105 written responses to the Customs consultative document. While almost all of them accepted the need to counter tax avoidance they drew attention to the potential compliance costs and the likely difficulty in meeting the proposed timetable. As the responses varied from the very general to a detailed comment on each option no meaningful count of those for and against each item is possible. I regret that I could not place copies of the responses in the Library without the consent of their authors, especially since some have provided detailed figures which they would regard as confidential. To seek such consent would require a disproportionate use of resources.
My right hon. Friend is announcing separately today the measures it is proposed to introduce.
§ Mr. Madden
asked the Chancellor of the Exchequer if he will seek powers to make relief available to companies, charged value added tax on imported raw materials, who encounter cash flow problems caused by the delay between value added tax being charged and being repaid; and if he will make a statement.
§ Mr. Brooke
It would be neither practicable nor compatible with EC legislation to give preferential VAT treatment to imports of raw materials. Cash flow problems can be minimised, and in some cases eliminated, by taking advantage of the deferment facility for payment of import charges.
§ Mr. Wiggin
asked the Chancellor of the Exchequer what gross and net revenue he expects to receive if Her Majesty's Customs and Excise implement the proposals contained in the consultative document on value added tax, "Input Tax, Origin and the Scope of Right to Deduct", issued in August; and what he estimates will be the compliance costs.
§ Mr. Brooke
[pursuant to his reply, 15 December 1986, c. 426]: My right hon. Friend is announcing separately today the measures it is proposed to introduce following consideration of the responses to the consultation document on VAT input tax deduction. The revenue effect of the changes is estimated to be an increased yield of VAT in 1987–88 of £300 million.
In responding to the consultation document, many organisations and individuals drew attention to the compliance costs of the proposals particularly in relation to partial exemption. There are two major elements: first, the calculations which may have to be done by a business making some exempt supplies, to ascertain whether it can be treated on de minimis grounds as fully taxable; and, secondly, the calculations which a partly exempt business must make in respect of its entitlement to deduct input tax.744W
The proposed new de minimis rules have been devised in order to be as generous and simple as possible while not open to manipulation and substantial revenue loss. There will be generous monetary limits for the benefit of small businesses and a list of certain exempt supplies which may be ignored by businesses outside the financial sector. In consequence, most businesses will be readily able establish whether they are eligible for de minimis treatment without having to make detailed calculations.
Where partial exemption calculations have to be made, there will inevitably be compliance costs. But the businesses involved will for the most part be large, with well developed accounting systems. While the proposed new partial exemption rules lay down a standard method for apportioning input tax, Customs and Excise will allow alternative methods, as they do now. The critieria for these alternative methods are simply that they should be practical, accurate and fair. Past experience is that in almost every case Customs and Excise have been able to agree either with a trade association or individual business a basis of calculation which utilies existing information systems and thereby minimises compliance costs.