The Value Added Tax (Supplies of Goods where Input Tax cannot be recovered) Order 1999

Explanatory Note

(This note is not part of the Order)

This Order applies to supplies of goods made on or after 1st March 2000. It adds a new Group 14 to Schedule 9 of the Value Added Tax Act 1994 (1994 c. 23), enacting the exemption required by Article 13B(c) of Council Directive 77/388/EEC (O.J. L.145, 13.6.1977, p. 1). This exemption prevents double taxation on the supply of goods if no tax is deductible on the purchase, acquisition, importation or production of the goods, because they are used for making exempt transactions or because the tax is blocked by a specific exclusion.

Article 2(2) of the Order updates the Index contained in Part I of Schedule 9 for this new group.

Article 2(3) of the Order adds a new Group 14 to Schedule 9.

Item 1 of the new Group sets out the conditions for the relevant supplier to make an exempt supply of goods. Item 1(a) requires the relevant supplier, or a predecessor of his, to incur some input tax on the goods used to make this supply. The goods used to make a supply are defined in Notes (1) and (2). The “predecessor” of a “relevant supplier” is defined in Notes (11) to (14). Item 1(b) requires all of this input tax to be “non-deductible”, as defined in Notes (3) to (5). Item 1(c) ensures that the exemption in this Group does not override the more specific regime which applies to most interests in land (exemption under Group 1 of Schedule 9, subject to the supplier electing to waive exemption).

Note (1) defines “goods used”, and thereby, the input tax to be considered for the purposes of applying the exemption. The relevant supplier or his predecessor must incur input tax on either obtaining the goods that are being supplied, or obtaining other goods used as components in producing the goods being supplied.

Note (2) adapts this rule where the supply of goods is a supply of a major interest in land (other than a supply excluded by Item 1(c)). The relevant supplier or his predecessor must incur input tax on either acquiring a major interest in the land concerned, or on goods such as building materials which become incorporated within a newly constructed building or civil engineering work on the land.

Note (3) defines “non-deductible” input tax as input tax falling within either Note (4) or Note (5).

Note (4) defines non-deductible input tax on goods used to make exempt supplies. No part of the input tax may be deductible as attributable to supplies giving a right to input tax deduction, whether the right to deduction arises before or after the supply of goods under consideration. In particular, the exemption does not apply if treating this supply as taxable would give rise to an input tax entitlement such as where there has been an adjustment in respect of a capital item by virtue of Part XV of the Value Added Tax Regulations 1995. However, an input tax entitlement arising only from the operation of the “de minimis” rule in regulation 106 of the Value Added Tax Regulations 1995 is ignored.

Note (5) defines non-deductible input tax which UK law specifically excludes from credit. The input tax must be blocked solely as a result of one of the provisions in Note (6) applying. In particular, the exemption does not apply to sales of cars or other goods which are eligible for treatment under the second-hand margin scheme. The provisions are those excluding entitlement to input tax on goods used for business entertainment, goods (other than building materials) incorporated in a zero-rated building, and motor cars.

Note (7) defines input tax to include VAT incurred when the person concerned was not a taxable person (that is, not registered or liable to be registered for VAT). Note (8) extends the definition of “non-deductible input tax” accordingly.

Note (9) ensures that the exemption cannot apply in cases where some or all of the VAT on the “goods used” for the supply in question has been recovered under the refund provisions for local authorities and similar bodies, government departments, or overseas traders.

Note (10) ensures that the exemption can apply where VAT was originally deducted on “goods used” for the supply in question, but those goods were later the subject of a self-supply for VAT purposes such as the self-supply of cars on which input tax was originally recovered, following a change of use.

Notes (11) to (14) ensure that the exemption can apply where the “goods used” to make the supply in question have been transferred as part of a transfer of a going concern, or a VAT group change has taken place after the input tax was incurred. Notes (11) and (12) ensure that a person (A) is a predecessor of another (B) where goods (or anything comprised in goods) are transferred from A to B as part of a transfer of a going concern which is not a supply for VAT purposes. Notes (11), (13) and (14) ensure that a person (A) is a predecessor of another (B) if A joins a group of bodies corporate which are treated as members of a group by virtue of section 43 of the Act, of which B is a representative member. These Notes also ensure that a person (A) is the predecessor of another (B) if the representative member of a VAT group changes from A to B, or if B leaves a VAT group of which A is a representative member.

Note (15) defines the phrase “anything comprised in goods” in the context of supplies of major interests in land.

Note (16) applies Notes (1) and (1A) to Group 1 of Schedule 9 to Group 14 so that grants of major interests in land include assignments, surrenders and reverse surrenders.