Red tape on reclaimable VAT to be cut

Small businesses, charities, banks and insurance companies could be in for an unexpected reprieve from wrestling with HMRC for their reclaimable VAT.

Under tax rules, these organisations are partially exempt from VAT and therefore share the challenge of a convoluted route in claiming the minimal amounts that they may recover.

HMRC has historically burdened this with more requirements each year but is now set to streamline the process as the taxman has finally realised the relationship between the increasingly complex calculations and the higher incidence of error.

‘This is an attempt to focus their resources on business compliance spending and take out the poor compliance risks,’ said Paddy Behan, head of indirect tax services at Mercury Tax Group.

Instead of businesses faced with a quarterly, or in some cases monthly, headache of calculating the VAT they can recover, the tax man is proposing that they look at their previous year’s result as their estimate. Once the year in question has finished they can then make an annual assessment.

A suggestion which Daniel Lyons, VAT and tax partner at Deloitte, describes as ‘spectacularly uncontroversial’ but likely to have a high take up.

Small businesses in which only a small proportion of their supplies are VAT exempt have traditionally been able to benefit from the ‘de minimis’ rule. However, again the calculations for working out eligibility were a tad complex.

The taxman is also proposing that if the value of exempt supplies is less than a prescribed amount and less than half the value of all supplies that the business could treat itself as de minimis.

Start-up businesses, too, are likely to benefit from being able to apply a standard method for working out their VAT status based on estimated use of exempt input supplies. Banks and insurance companies could also be allowed to pool similar property assets rather than working out the VAT recoverable on each building according to use.

Getting a smooth running system in place is paramount for the taxman and Behan believes VAT is a major battleground. ‘The risk for the revenue of litigation is high. They just need to lose one major case with a bank or insurance company to seriously reduce a whole year’s revenue.’

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