To simplify VAT, adopt OECD’s International VAT/GST guidelines

This would obviate the need for both partial exemption and the capital goods scheme.

As a long term improvement to VAT, the UK should adopt the principles in the OECD International VAT/GST guidelines which on neutrality (see Guideline 2.1) state that the burden of value added taxes themselves should not lie on taxable businesses except where explicitly provided for in legislation. Adopting these guidelines would enable all input tax incurred for business or charitable purposes to be claimed in full for all business and charitable activities.

ICAEW Tax Faculty expressed this view in its response ICAEW REP 101/19 to HMRC’s call for evidence on the operation of VAT partial exemption (PE) and capital goods scheme (CGS).

Adopting the principles in the OECD’s guidelines would simplify VAT compliance and therefore implementation of Making Tax Digital for VAT because it would remove the need for PE methods and the CGS, and the only type of adjustment required would then be for business/non-business use, which would affect a relatively small number of those who are VAT registered.

If adopted, it would be appropriate to reconsider the exemption (without input tax credit) from many supplies that currently receive that treatment, with a view to removing some or all of them.

However, we recognise that such changes would potentially have considerable practical, revenue and political difficulties that would need to be addressed.

On the basis that existing VAT exemptions are retained, we recommend simplification of the existing PE rules and removing the CGS or, at the least, limiting the CGS to property purchases and new constructions only and increasing the threshold.