There is no point trying to hide it; the subject of this blog is pretty dry. But it is also “popular” in the sense that a large part of the tax-paying community needs to understand it, whether they like it or not.
It’s “partial exemption”.
This subject changes in a substantial way in 2011. Draft clauses have been issued for our perusal (see HMRC Brief 47/10) and, if unaltered, they will usher in some new and underwhelming (but important) rules.
For entrepreneurs who buy goods which they use partly for business, and partly for private, and who may be familiar with being able to reclaim 100% of the VAT (and then paying a VAT private usage charge), this will be shelved from January 2011. You will have to apportion all such costs which fall after the change. Your cash flow advantage disappears. It is replaced with a series of adjustments to the claim you make, under the Capital Goods Scheme. This has a similar effect in tracking non-business use over the supposed ten year lifetime of the purchase, only it has no inherent cash flow upside. You simply adjust the original apportionment, assuming it even needs adjusting. And CGS (as we acronym nerds call it) only applies to purchases of a certain size.
They are proposing also that those adjustments need not be made as long as they would not be particularly great. But the definition of “not particularly great” is precise and will require you to do a calculation every year to be sure it isn’t; which isn’t so helpful after all.
Those of you which are charities will have the biggest plus out of these changes since you will be able to apply (if you wish) for a combined method covering non-business and partial exemption apportionment. You will therefore not necessarily need to distinguish between exempt supplies and non-business activities (though you will still have to recognise taxable activities of course). Those who are not charities may find it strange to suggest that the distinction should ever cause a problem, but in charity-land it often does. And the inclusion of private use in CGS, mentioned above, will apply in the same way to non-business use of relevant assets by charities and other not-for-profit bodies.
There are some other intriguing changes, like the definitions of works to be included in CGS, and “part disposals” of property (which generally involves inserting the words “or part” in bits of the legislation).
It’s great fun, if you can first get over the essential other-worldly inaccessibility of the subject. Who knows, you may actually enjoy it.
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