The bill inserts a new section into the Value Added Tax Act 1994 that requires the Secretary of State to make orders exempting supplies of goods or services that the Secretary considers beneficial to the environment, to health and safety, to education, or for charitable purposes by varying Schedule 9 (exempt supplies). The new power permits different treatment in different cases and allows consequential and transitional provision, including amendments to the Act.
This is significant because it converts what is normally a discretionary tax policy tool into a statutory duty to grant exemptions based on a subjective appearance test. The mechanic—changing Schedule 9 to create exemptions rather than zero-rating or direct spending—has particular operational and fiscal consequences for HM Treasury, HMRC administration, suppliers and recipients of those supplies, and for competitive neutrality across sectors.
At a Glance
What It Does
The bill adds section 31A to the VAT Act 1994, obliging the Secretary of State to use orders to exempt supplies judged beneficial by varying Schedule 9 (the list of exempt supplies). Orders may make different provision for different cases and may include consequential or transitional amendments to legislation.
Who It Affects
Suppliers and purchasers across sectors that sell or procure goods and services claimed to be environmental, educational, health-and-safety-related or charitable; HMRC and Treasury for implementation and revenue forecasting; and organisations that advise on VAT classification and compliance.
Why It Matters
By mandating exemptions via Schedule 9, the bill changes the default tax treatment and shifts the policy lever from discretionary relief or spending to tax exemption, with implications for recoverability of input VAT, fiscal cost, and administration. The statutory duty is triggered by a subjective test—‘where it appears’—which broadens ministerial discretion.
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What This Bill Actually Does
The bill does a small legal thing with a big practical effect: it inserts a mandatory duty into the VAT Act requiring the Secretary of State to create exemptions for supplies the Secretary thinks are beneficial to four broad public-policy categories. Instead of giving ministers a discretionary power to change VAT treatment, it tells them they must make orders to vary Schedule 9 when the requisite appearance is met.
Those orders are the instrument for creating or widening VAT exemptions.
Orders under the new section may treat different cases differently and may include consequential and transitional measures, including amending other parts of the Act. The bill also places the power to make these orders within the framework of section 97 (an existing provision governing orders, rules and regulations), by adding the new order type to the list in that section.
The Act is UK-wide in extent and would commence on royal assent.Practically, the bill creates new pressure points. Schedule 9 lists exempt supplies; exempt status differs from zero-rating because an exempt supply does not allow the supplier to reclaim input VAT.
That distinction matters for business pricing and for charities or public bodies that purchase exempt supplies: exempting a supply can raise effective costs for suppliers and buyers who cannot recover input tax. The bill’s absence of statutory definitions or procedural constraints—‘where it appears’ is the only threshold—means ministers and officials will need to develop criteria and administrative processes to identify qualifying goods and services, to draft orders that vary Schedule 9, and to manage transitional arrangements.Finally, although VAT is a reserved, UK-wide tax, the bill’s broad categories and mandatory language create potential touchpoints with devolved administrations and with wider tax policy (for example, prioritising exemption instead of direct subsidies).
HMRC will carry the administrative burden of implementing any exemptions and policing eligibility, while Treasury will face the fiscal trade-offs of foregone VAT revenue versus the intended policy gains.
The Five Things You Need to Know
The bill inserts a new mandatory duty (section 31A) into the Value Added Tax Act 1994 requiring the Secretary of State to provide exemptions by varying Schedule 9 when supplies appear beneficial to the environment, health and safety, education, or for charitable purposes.
Orders under section 31A must be made by the Secretary of State and may make different provision for different cases and include consequential or transitional provision, including amendments to existing law.
The bill adds the new order type to section 97’s list (by inserting paragraph (zca)), bringing orders under section 31A into the Act’s broader orders, rules and regulations regime.
By targeting Schedule 9 (exempt supplies) the bill creates exemptions that typically prevent suppliers from reclaiming input VAT—a materially different outcome from zero-rating that can raise costs for VAT-incurring businesses and buyers.
The Act extends across England and Wales, Scotland and Northern Ireland and would come into force on the day it is passed, making any orders immediately actionable once made.
Section-by-Section Breakdown
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Mandatory duty to exempt supplies deemed beneficial
This is the bill’s core. It requires the Secretary of State, when satisfied that goods or services are beneficial to one of the four listed public-policy areas, to make an order varying Schedule 9 so those supplies are exempt from VAT. The provision frames the condition as subjective — ‘where it appears’ — and makes exemption the default action rather than a discretionary choice. For practitioners, the key practical effect is that consequential orders will alter the statutory list of exempt supplies rather than adjusting rates or issuing guidance.
Flexible drafting: differential, consequential and transitional provisions
The bill expressly allows orders to make different provision for different cases and to include consequential or transitional provisions, including amendments to the VAT Act itself. That drafting power can be used to carve out narrow exemptions, phase in treatment, or create bespoke transitional rules, but it also permits complexity — different tax outcomes for different suppliers or transactions — which raises compliance and enforcement issues for HMRC and taxpayers.
Places orders under existing orders/regulations framework
By inserting an (zca) reference into section 97, the bill ensures orders made under the new section 31A fall within the Act’s orders, rules and regulations machinery. The text does not specify parliamentary procedure (affirmative/negative) for these orders; it simply includes the new order type in the statutory list, so the eventual statutory instrument procedure will be determined by section 97 and related drafting practice.
UK-wide application and immediate commencement
Section 2 confirms the Act applies to England and Wales, Scotland and Northern Ireland and takes effect on the day it is passed. That immediate commencement means any delegated orders made under the new duty would be possible without further delay, and it underscores the need for rapid policy and administrative work if exemptions are to be applied promptly.
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Who Benefits
- Producers of qualifying environmental goods (eg low-emission technologies, certain recycling equipment): Exemption could reduce final prices or encourage wider uptake if suppliers pass the tax saving to buyers.
- Educational institutions and training providers offering qualifying services: They may see lower costs for specific supplied goods or services if those supplies are exempted under Schedule 9.
- Charities and nonprofit service providers that either supply or purchase qualifying items: Depending on the supply chain, some charities could benefit from exempt status for services they provide or procure, particularly where the exemption lowers consumer-facing prices.
Who Bears the Cost
- HM Treasury: Exempting supplies reduces VAT receipts, creating fiscal cost that must be offset elsewhere or increase borrowing.
- HMRC: Implementation, classification guidance, audit and enforcement of new exemptions will increase administrative workload and require resource reallocation or additional funding.
- Suppliers that incur unrecoverable input VAT: Because Schedule 9 exemptions typically prevent recovery of input VAT, businesses that supply exempt items may see higher operating costs unless orders use zero-rating instead (the bill targets exemptions, not zero-rates).
- Devolved administrations and public bodies: Although VAT is a UK-wide tax, devolved governments may face policy or budgetary consequences from changes in tax treatment that affect local programmes and procurement.
Key Issues
The Core Tension
The central dilemma is whether to grant ministers broad, mandatory power to create VAT exemptions intended to advance public goods—speeding support for environment, health and education—or to preserve tax neutrality, predictable fiscal receipts, and tight statutory criteria. Mandating exemptions via a subjective ‘appears’ test makes it easier to target support quickly, but it risks inconsistent application, fiscal leakage and unintended costs for suppliers and purchasers who cannot reclaim input VAT.
The bill deliberately leaves the critical terms and thresholds undefined: it does not say what standard of evidence or consultation the Secretary of State must use before concluding a supply ‘appears’ beneficial. That open-ended language gives ministers wide discretion but also creates legal uncertainty for businesses and HMRC about how to classify supplies and when an exemption will be enacted.
Practically, HMRC will need to establish procedural safeguards and criteria to limit inconsistent application and to ensure orders are targeted and administrable.
Second, the bill relies on exemptions via Schedule 9 rather than zero-rating or direct subsidy. Exempt supplies generally mean suppliers cannot reclaim input VAT, which can increase their costs and, in many cases, make the relief regressive or counterproductive (for example, increasing the cost of delivering an educational service bought by a VAT-registered provider).
The economic outcome for the intended beneficiaries therefore depends heavily on the specific drafting of orders and any accompanying transitional or compensatory measures. Finally, the insertion of the order type into section 97 does not, on the face of the bill, constrain the level of parliamentary scrutiny for the delegated instruments; the choice of affirmative or negative procedure and the degree of pre-legislative consultation will determine democratic and legal checks on ministerial discretion.
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