On 19 June 2008, HMRC launched a consultation, as announced in the 2008 Budget, on ideas to simplify the VAT partial exemption and capital goods scheme rules.

The consultation focuses on simplifying three specific aspects of partial exemption:

1. The standard method of adjustment for recovery of input tax.

2. The de minimis rules for recovery of input tax.

3. The capital goods scheme, including a proposal to bring IT services within the scheme with an adjustment period equal to accounting amortisation.

Additionally, the government is inviting comments on the possibility of combining the partial exemption and business/non-business calculations, which currently require certain businesses to apportion VAT to their business supplies before applying the partial exemption calculation.

The simplification aims to reduce compliance costs for business so it is a welcome move by the government as the proposed options generally appear reasonable and useful. However, the proposal to include IT services within the capital goods scheme may have the effect of bringing certain partially exempt businesses within the scheme for the first time. Given the associated compliance burden and potential for input tax clawback, businesses may not welcome this change.

Comments on the consultation paper are invited to be submitted by 30 September 2008.