Partial Exemption VAT
Do you provide a mixture of supplies where the VAT treatment of each is different?
Where a business makes both taxable and exempt supplies then it has to calculate how much VAT it is entitled to recover on business expenditure – this is done by way of a partial exemption calculation.
Here is a list of -> Exempt Supplies
Where a business makes fully taxable (VATable) supplies it can register for VAT and can recover in full any VAT that it incurs in the course of making those taxable supplies.
Where a business makes fully exempt supplies it is not entitled to register and so has no ability to recover VAT that it incurs in the course of its business.
Partial Exemption Calculations:
Standard method
This is the default method and doesn’t require approval from HMRC for use, and there are 3 stages involved;
- The total value of income defined as ‘taxable’ is worked out as a proportion of the total income to work out how taxable the business is as a percentage. This percentage is rounded up to the next whole number under this method.
- The VAT on expenditure is attributed to one of three categories, A = wholly taxable use, B = wholly exempt use, and C = unattributable, or ‘pot’. All of ‘A’ and the taxable percentage of ‘C’ will always be recoverable in full. The remainder is defined as ‘exempt input tax’.
- The exempt input tax value is compared to the relevant ‘de minimis’ limits. If the comparison shows that the value meets both conditions of the de minimis test then all VAT on expenditure can be recovered in full (the business is deemed to be ‘fully taxable’). If either element of the test is not met then the business is ‘partly exempt’, and only the taxable part is recoverable (being A + % of C as above).
Special method
Where the standard method does not accurately reflect the business structure or sector, and does not produce a ‘fair and reasonable’ result, then it is possible to request that a special method be used instead. This would require HMRC approval, and would use different calculations (for example proportional floor space, employee time, head count) rather than income values. The calculation would still require attribution of VAT on expenditure, and would still be compared to the same de minimis limits.
Standard method override
Where the standard method does not produce a fair and reasonable result it may have to be overridden. This would apply where the amount of input tax recovered “differs substantially” from the actual use for taxable purposes. The definition of substantial is where the difference exceeds
- £50,000 or
- 50% of the ‘pot’ value (C) and £25,000
Examples of situations where this might apply include delayed or abandoned projects where input tax might be recovered in advance, business units using costs to make different supplies, or costs incurred in one year that will not be used until a later year.
Annual adjustments
All methods require an annual adjustment that effectively recasts the values for the longer period and may result in adjustments – either VAT to be paid back or additional VAT to be recovered. There are also some simplifications to the standard method that allow provisional values to apply throughout the year with an annual adjustment at the end, and some simpler calculations that avoid having to carry out a full partial exemption calculation.
Making Tax Digital – MTD
Your options on how to make the quarterly and annual adjustments will depending on the Software you have chosen to file your MTD tax returns with. Here at Darrall & Co we will do our best to guide you through this.
We’ve been through the mill already – read about this here:
https://www.darrallandcompany.com/making-tax-digital-pilot-test/
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