HMRC have published a summary of responses to their 2019 consultation 'Call for evidence: simplification of partial exemption and the Capital Goods Scheme'. HMRC are changing internal processes and will engage further on this topic with stakeholders in the future.
The 2019 Call for evidence focused on three distinct areas:
- Simplification of the Partial Exemption Special Methods (PESMs) approvals system.
- The Partial Exemption (PE) de minimis test and thresholds.
- Changes to the Capital Goods Scheme (CGS) thresholds along with the administration and scope of the CGS.
Partial Exemption Special Methods
- Over half of respondents felt the time taken to agree a PESM is excessive.
- A third described the process as either difficult, challenging, onerous or frustrating, often due to the time taken or lack of clarity about what was required.
- The majority felt that the administration involved with PESMs was challenging, generally due to HMRC's processes and subsequent negotiation.
- Concerns were raised about removing the PESM approval process. It could reduce business certainty and businesses could be at risk of future assessments and penalties.
- There was a majority of support for increased focus on sectoral frameworks, where they are optional, flexible and developed in partnership with industry experts.
- Additional guidance about what is required to apply for a PESM in the form of a checklist or template was suggested.
Partial Exemption de minimis
- The de minimis test was regarded as a valuable simplification but it is also considered complex and takes considerable effort and time to apply.
- Many respondents felt that increasing the de minimis threshold, at least in line with inflation, would be an advantage as it would:
- Allow greater input tax recovery.
- Ease administrative burden.
- Remove uncertainty for those on the threshold.
- Take some businesses out of the current PE requirements and encourage more Voluntary VAT registrations.
- Some possible disadvantages of increasing the de minimis threshold were noted. A higher threshold could create:
- A ‘cliff edge’ for those who would no longer be able to benefit from the de minimis as they approach the threshold. This may disincentivise business growth.
- An administrative burden for HMRC and businesses on the edge of the threshold
- Few respondents were aware of the de minimis simplification, with even less making use of it.
- Many respondents indicated that the removal of the de minimis test altogether would be a disadvantage: it would force smaller businesses into PE, requiring full calculations.
Capital Goods Scheme
- Respondents reported their experience of the CGS as burdensome, complex, time-consuming and resulting in minimal adjustments.
- In some cases, the CGS is not well known or understood.
- Generally, respondents were in favour of a threshold increase:
- This would reduce the number of assets falling within the CGS, simplifying record-keeping and reducing administrative burden.
- Disadvantages included some taxpayers and HMRC, losing out from future changes in asset usage.
- It was generally acknowledged that having differing thresholds for the CGS would increase complexity and not be a simplification.
- Very few respondents had experience of computers being included in the CGS.
- It was agreed by the majority that computers should be removed from the scope of the CGS, although this would have limited simplification benefit.
- Current CGS intervals were generally considered appropriate, although a change in the number of intervals would help businesses with VAT administration, particularly with the Transfer of Going Concern record keeping requirements.
HMRC have carried out an internal review of PESM processes and, in order to simplify the current system, will:
- Introduce a centralised application point to receive and record all PESM applications.
- Introduce an application form in order to apply for a PESM which will guide applicants through the process, making clear the information required.
- Undertake a review of all frameworks, considering the need for new frameworks. In addition, PE and CGS guidance is being reviewed and updated.
HMRC will continue to engage with stakeholders to evaluate the above changes and to understand the impact of threshold and process changes that may be made in the future.
Useful guides on this topic
Call for evidence: simplification of partial exemption and the Capital Goods Scheme
HMRC published Call for evidence: simplification of partial exemption and the Capital Goods Scheme in July 2019.
Capital Goods Scheme
What is the VAT Capital Goods Scheme (CGS)? When do I use it? How does it work?
Partial exemption & input VAT
How do you calculate the amount of input tax you can recover under the VAT partial exemption rules? What are the de minimis rules?
Is voluntary VAT registration worthwhile?
When can a business voluntarily register for VAT? When would it be beneficial to voluntarily register?