VAT refund rules reforms and Public Sector

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The Treasury has published a consultation document on reforms to the VAT refund rules. The government departments, devolved administrations, the NHS and Highways England are eligible for VAT refunds under Section 41 of the VAT Act 1994 Under the current VAT refund rules.

However, unlike commercial organisations, public sector organisations do not carry out business activities. And therefore cannot reclaim VAT incurred on the goods and services they purchase.

Section 41 in its current form is unduly complex, administratively burdensome and a barrier to effective financial planning. The government commits to improving the UK economy’s productivity. Also to ensure a robust and reliable tax system, capable of generating the revenue to support our public services.

To achieve this, the tax system should be as simple and efficient as possible. It should create the right incentives to deliver value for money and world-class public services to the taxpayer.

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The Treasury is seeking to extend the scope of Section 41 to permit full refunds of the VAT incurred on all goods and services incurred during the course of non-business activities for those organisations currently falling within the scope of the Section.

It suggests departmental irrecoverable VAT costs total £10bn-£15bn, but the Treasury notes these estimates are highly uncertain as data is not currently readily available.

Therefore, Treasury says reforming Section 41 in this way will improve tax neutrality in government procurement.

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