To be or not to be …exempt’

Over the last few years with Brexit, budget and legislative changes it has been questioned as to whether the VAT act, which is now 28 years old, could do with a rewrite! In particular the issue of VAT exemptions and whether they would even be introduced in the modern world, to achieve the original objective.

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The main purpose of VAT exemption is to remove the burden of VAT from the end consumer. The problem is that in many applications, exemption increases the cost to the final consumer where, for other reasons the consumer would never bear the cost of VAT. In some cases the level of complexity exemption adds, in terms of calculating the organisation’s VAT recovery, significantly increased the cost against the exempt services, making these measurably more expensive to the consumer.

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Whilst the case for exempting services provided by charities appears to be logical resulting in the end consumer not paying VAT on the services they engage the charity to provide. The logic fails when these are substantially grant funded. In these cases, the irrecoverable VAT incurred by the charity in making these supplies (which it is unable to be recovered as a result of the exemption) in fact outweighs the VAT that would be charged on the service to the end consumer. The result is that the charity and the consumer would have been better off if the charity had charged VAT on the service. The VAT would have been recoverable as a result of this taxable treatment and would have reduced the cost to the charity of making the supply. Ultimately this would result in a lower cost supply and a saving on the administrative cost of having to do partial exemption calculations.

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The very obvious example of exemption failing to achieve anything but increasing costs is services in the care sector. In care homes where welfare services provided to a local authority are exempt despite the fact that a local authority would be able to recover any VAT charged on these services.? The mind truly boggles.

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We’d love to hear your opinions on this or whether you have come across any tricky cases? Comment below or message us directly.