Many businesses make both taxable and exempt supplies and are consequently regarded as partly exempt for VAT purposes. 

Partial exemption can be a complex business, but there are some simple rules which businesses should follow.

Here we list our Top 10 key points for the partly exempt business: -

 - De minimis – don’t forget that small levels of VAT incurred relating to exempt activities may be claimed by a business as though it were fully taxable. See HMRC Notice 706, Section 11 for the revised de minimis limits.

 - The standard, published method is based on the outputs of the business (i.e. the value of its supplies), but with the facility to apply a use based method in the 1st year.  This calculation is applied to the input tax on overheads of the business, after input tax which is directly attributable to taxable and exempt supplies has been identified.

 - Where the standard method is not considered to provide a fair and reasonable result, it should be possible to agree an alternative special method with HMRC.

 - The de minimis thresholds do not automatically apply to special methods; don’t forget to include them in any application for a special method if you want to be able to rely on them.  Also remember that with a VAT Group the de minimis applies to the VAT Group as a whole.

 - Special methods can be based on any reasonable calculation – such as floor space, head count or use etc.

 - HMRC are able to override the existing scheme calculation if it breaches certain levels and is considered not to provide a fair a reasonable result.

 - “Fair and reasonable” can be subjective, and businesses should consider the whole of its business when considering whether a partial exemption method is fair and reasonable or not.

 - The partial exemption calculation is regarded as provisional during any year, with an annual adjustment required which will balance out any anomalies during the year.

 - Partial exemption should take account of any Capital Goods Scheme adjustments (which is a whole subject of its own!)

 - Don’t forget to review your partial exemption method, as it may no longer be appropriate!