No: C&E 12                           29 November 1994


                         BUDGET 1994 : VAT

         CHANGES TO THE PARTIAL EXEMPTION DE MINIMIS LIMIT


The Chancellor announced changes to the rules on the VAT
partial exemption de minimis limit to combat tax avoidance which is
estimated to cost Pounds 20 million a year.

From 1 December 1994, to qualify for treatment under the de
minimis limit, businesses must satisfy the additional condition that
VAT incurred on the exempt supplies they make (exempt input tax)
must be no more than 50 per cent of the VAT on all their purchases.

At the same time, the qualifying limit for businesses
satisfying the new condition is to be raised. Currently, businesses can
reclaim all    their input tax when making exempt supplies if their exempt
input tax amounts to no more than Pounds 600 per month, on
average, or Pounds 7,200 per year. These amounts will be increased to Pounds 625 and
Pounds 7,500.

The Chancellor's intention is to maintain the real purpose
of the provision but at the same time to prevent it being abused.
The limit was designed to allow small businesses to reclaim all the
VAT on    their inputs, even when they make some exempt supplies, thus
reducing  the need for small businesses to apply the full partial
exemption system. The provision has been abused by some exempt traders
who have artificially created small VATable supplies, such as a
few toothbrushes, in order toreclaim VAT on all their purchases.


NOTES FOR EDITORS

1.     It is a basic principle enshrined in European
Community and UK law that input tax is deductible only where it has been
incurred in the making of taxable supplies.  Input tax incurred on goods
and services used in making exempt supplies is almost without
exception not deductible.  Businesses making both taxable and exempt
supplies  (partly exempt traders) are required to apportion their
input tax in order to determine how much is deductible.

2.     The purpose of the de minimis provision is to
simplify matters for small businesses that make some exempt supplies,
but who  would normally register for VAT because they also make a
significant amount of taxable supplies.  The de minimis provision frees
such businesses from having to operate the full partial exemption
system by allowing them full tax recovery.  The Budget changes
prevent the de minimis provision being abused by businesses who have
artificially created very minor taxable supplies.  The new limits will
operate      from the beginning of tax years starting on or after 1
December 1994.

3.     A Compliance Cost Assessment (reference CCA 10) is
available, copies of which can be obtained from Jill Lewis, BACU3, 10th
floor W, HM Customs & Excise, New King's Beam House, 22 Upper Ground,
London SE1 9PJ (Tel No: 0171-865-5570).

4.     Details for traders are available in Budget notice BN
51/94.






ISSUED BY:         HM CUSTOMS AND EXCISE,
                   PRESS AND INFORMATION OFFICE,
                   NEW KING'S BEAM HOUSE,
                   22 UPPER GROUND,
                   LONDON, SE1 9PJ

TELEPHONE:         0171 865 5468/5470/5471

FAX:               0171 865 5625