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Customs news - Partial exemption

19 September 2001
Issue: 3825 / Categories:

Customs has commented further on the House of Lords decision of 23 May 2001 in Commissioners of Customs and Excise v Liverpool Institute of Performing Arts [2001] STC 891.

Customs has commented further on the House of Lords decision of 23 May 2001 in Commissioners of Customs and Excise v Liverpool Institute of Performing Arts [2001] STC 891.

The case concerned the scope of the partial exemption standard method (as described by Regulation 101 of the VAT Regulations 1995), and what supplies should be included in it. Customs argued that the standard method calculation determines the deduction of VAT relating to supplies made within the United Kingdom and does not determine the deduction of VAT relating to supplies made outside the United Kingdom.

The House of Lords agreed with Customs. It found that two separate régimes exist under the VAT Regulations 1995 for determining the amount of value added tax that a taxpayer can deduct:

* Regulation 101 which determines the deduction of VAT relating to supplies made within the United Kingdom; and

* Regulation 103(1) which determines the deduction of VAT relating to supplies made outside the United Kingdom.

Regulation 101 cannot therefore be used to determine the amount of VAT to be deducted relating to supplies made outside of the United Kingdom.

Regulation 103(1) supplies fall into two categories:

* those that would be taxable if they were made within the United Kingdom, e.g. advertising services; and

* those that would be exempt if they were made within the United Kingdom and which are specified in an Order under section 26(2)(c), Value Added Tax Act 1994, e.g. certain finance and insurance supplies made by a United Kingdom based business to a customer who belongs outside the European Union.

Non-specified exempt supplies are those supplies made outside the United Kingdom that would be exempt if they were made within the United Kingdom, but which are not specified in an Order under section 26(2)(c). The House of Lords confirmed that these supplies are to be given a similar treatment to exempt supplies made in the United Kingdom. While the VAT incurred in making these supplies cannot be deducted, the value of these supplies must be included within the standard method calculation.

If a taxpayer makes taxable and exempt supplies in the United Kingdom as well as making supplies outside the United Kingdom, then both Regulations 101 and 103(1) need to be applied. Regulation 103(1) is always to be applied first.

Customs can approve or direct that a partial exemption special method be used instead of the standard method. While Customs can approve a special method to deal with out of country and specified exempt supplies, they cannot direct the use of one. If an approved special method already deals with out of country and specified exempt supplies, then no action is necessary. But, if the special method does not deal with these supplies then they should be dealt with under Regulation 103(1) before the special method is applied.

(Source: Customs Business Brief 12/01 dated 11 September 2001.)

Issue: 3825 / Categories:
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