VAT Partial Exemtion

Partial Exemption
Directly attributable expenses to taxable supplies will be recoverable in full. Therefore, if input VAT has been incurred solely in relation to the making of taxable supply, all of this will be recoverable.
 
If, however, input tax has been incurred solely in relation to the making of exempt supply then this is not recoverable (subject to de-minimis rules, covered later)
 
There will also be input VAT leftover, residual input VAT, not directly attributable to either taxable or exempt supplies (VAT on accountancy fees, for example). As a partially exempt business, you will need to use one of the approved methods below to work out how much of your residual input VAT can be recovered.
 
The Standard Method or Special Method
The default, Standard Method, uses the split between taxable and exempt turnover in the business as the basis for calculation.
For example, if a business had a turnover of £100,000 in a quarter, with £80,000 of this relating to taxable supply (vatable sales) and £20,000 relating to exempt supplies (non-vatable sales), then 80% of the residual input VAT would be recovered and the remaining 20% will not be recoverable.
 
If you have rental income figures, you could calculate the percentage based on the revenue which may be advantageous to you, depending on the figures.
 
However, if the Standard Method is deemed not to give a fair and reasonable result, then you could apply to HMRC to use a Special Method for calculation.
 
Possible special methods include transaction based, staff apportionment or square foot, however HMRC may not accept these and any special method would need to be accepted by HMRC.
 
The de-minimis limit
When the input VAT attributable to exempt supply (both directly and through residual calculation) is below the de-minimis limit then all the input VAT incurred in that quarter is recoverable.
 
The following 2 conditions should apply to be below the de-minimis limit:

• Input VAT attributed to exempt supplies must not exceed £1,875 for the quarter (£625 for a monthly return and £7,500 for an annual calculation); and 
• Input VAT attributed to exempt supplies must not exceed 50% of the total input VAT incurred in that quarter.

Effectively this allows up to £7,500 worth of input VAT relating to exempt supply to be recovered by a partially exempt business that would otherwise not be recoverable.
 
Annual Adjustment
Partially exempt businesses completing their VAT on a monthly or quarterly basis should do a partial exemption working for each period to ensure that they remain below the de-minimis limit in the period.
 
If the de-minimis limit was breached in a month or a quarter and VAT was not recovered but overall the de-minimis limit for the period was not breached then this input VAT becomes recoverable now, however if the de-minimis limit is breached on the annual calculation then any input VAT attributable to exempt supplies recovered previously would become repayable to HMRC.

If you have any questions about VAT please contact us on ​​​[email protected].