Partial Exemption (PE), as specified under VAT Notice 706, is a notoriously complex area as HMRC readily acknowledges. It admits PE can “involve a significant amount of administration for businesses, with complex calculations often being required for some businesses to determine the amount of input tax that they are entitled to recover”. This lead the tax authority to issue a call for evidence to the industry in July to determine if there was a way PE could be simplified, and the measures it proposed included a change to the PE Special Method (PESM) approval process and the increase or scrapping of the de minimis limit. But can these truly reduce the burden of PESM on the business?
A recent Ipsos MORI poll found 68% of those businesses using PE had incurred associated compliance costs, most of which related to staff time and the cost of hiring an often expensive adviser. It’s a finding substantiated by the Chartered Institute of Taxation (CIOT) and Association of Taxation Technicians (ATT) who, in their response to the HMRC consultation, said PE requires “quarterly and annual calculations…as well as the work undertaken to allocate costs of the business to the taxable/exempt/residual categories, which many businesses find difficult”. Surely the solution, then, is to find a way to reduce this compliance burden?
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