A business that incurs expenditure on taxable and exempt business activities is termed as partially exempt for VAT purposes. In essence, the business has to make an apportionment between the exempt and chargeable activities using a 'partial exemption method'. This is required in order to calculate how much input tax is recoverable.
There are a number of partial exemption methods available. The standard method of recovering any remaining input tax is to apply the ratio of the value of taxable supplies to total supplies, subject to the exclusion of certain items which could distort the numbers. The standard method is automatically overridden where it produces a result that differs substantially from one based on the actual allocation of inputs. It is possible to agree a special method with HMRC.
Under certain conditions, the VAT incurred on exempt supplies can be recovered. This is subject, however, to two, parallel de-minimis limits. The tests are met, and VAT can be recovered on exempt supplies, where the total value of exempt input tax:
- Is under £625 a month (£1,875 a quarter/£7,500 a year); and
- Is less than half of the total input tax incurred.
If both tests are met the VAT can be recovered. Businesses that are partially exempt, need to complete this calculation on a quarterly and annual basis. Please call if you need help making these calculations.