Partial Exemption VAT

V-A-T as easy as 1 2 3 … or is it?

If you make both taxable and exempt supplies and incur input tax that relates to both kinds of supply, you are classified as ‘partly exempt’. This often applies to landlords with multiple properties, where one has been opted to tax and another has not.

If your business is partly exempt then you must undertake calculations to work out how much input tax you may recover. Firstly, identify the input tax which is used exclusively to make taxable supplies and the input tax which is used exclusively to make exempt supplies. That which is used for taxable supplies can be recovered in full and the input tax relating to exempt supplies is irrecoverable.

Any remaining input tax that cannot be directly attributed (for example, relating to overheads such as light and heat etc) is ‘residual’ input tax and you will need to apportion this between the taxable and exempt supplies to determine recoverability.

The standard apportionment is Taxable supplies (excluding VAT) divided by Total supplies (excluding VAT). This fraction is expressed as a percentage and the percentage is then rounded up to the next whole number.

That percentage is applied to the residual input tax and the resulting figure is added to the earlier identified recoverable amount, with the remaining residual input tax added to the irrecoverable amount.

The good news is that is that if your total irrecoverable input VAT in a quarter is less than £1,875 (£625 per month) then it is classed as de minimis and becomes fully recoverable.

Unfortunately that isn’t quite the end of the process, as an adjustment is required at the end of your financial year which takes into account the year as a whole, rather than just the individual quarters. This follows the same process as above, however annual figures are used instead of quarterly figures. If there is a difference when comparing the quarterly reclaims to the annual claim an ‘annual adjustment’ is needed.

The annual adjustment should be accounted for on either the first VAT return of your new year or the final return of the current year.

If you would like to know more about partial exemption, or the fascinating world of VAT in general, please get in touch with a member of our team.

Francis Stevens

Francis is AAT qualified and is currently studying for the ATT qualification