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VAT Reform: public sector bodies and tax exemptions

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For some years now, the European Commission has been considering how the VAT treatment of public bodies and exemptions in the public interest could be reformed.

For some years now, the European Commission has been considering how the VAT treatment of public bodies and exemptions in the public interest could be reformed.

Two economic studies were initiated to evaluate options and implications. The commission is now consulting interested stakeholders for their views on the issue, with responses due by 25 April.

For VAT purposes, a ‘supply for consideration’ is taxable if it qualifies as an economic activity, but there are some special rules that allow public bodies to treat certain activities as non-business if:

  • such treatment does not lead to significant distortions of competition
  • the activity in question is not a listed item, or if listed is carried out on a negligible scale.

The studies have shown that the competition caveat is ineffective due to the differential VAT treatment that could apply to an activity undertaken by both a public and private body – for example a body competing in the same market as a local authority for the provision of waste services where the authority would be at an advantage if not required to charge VAT.  

Other special rules may allow local authorities to treat certain activities undertaken by public bodies as non-business rather than exempt, and for certain activities in the public interest to be treated as exempt from VAT.

The commission wants to address the problems caused by these special rules and is taking views on the four reform options identified. 

Option one provides for a full taxation model whereby all supplies within the public sector, currently treated as non-business or exempt, would become taxable. This could see services covered by council tax being subject to VAT.   

Option two would see a refund solution at EU level for VAT incurred on non-taxable activities.  

Under Option three, tax exemptions in the public interest will be kept but current non-business activities would become taxable.

Option four will review the specific sectors where distortion of competition arises.

What now?

These options are radical and it will be a challenge to achieve agreement from all member states on which option to implement.

Successive UK governments have maintained the promise to shield council tax payers from VAT on local authority services.

Politically, the UK may resist any of the proposed changes if it meant reneging on that promise.

Joe Francis, senior VAT manager, Grant Thornton UK LLP

Column sponsored and supplied by Grant Thornton





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