Partial VAT exemption can be an extremely complex area. And one that could possibly cost you money when it comes to irrecoverable VAT.
As well as potentially leaving you out of pocket (which you definitely don’t want), it can also use up other valuable resources and it’s often difficult to find reliable information about doing the necessary calculations.
Getting clarity about exactly what you should be doing, and how you should do it, can also involve detailed and time-consuming discussions with HMRC.
This brief guide will give you an overview of the basics.
What Partial VAT Exemption Is
Partial VAT exemption rears its head if your VAT-registered business is involved in a mixture of activities that are taxable and activities that are non-taxable.
The latter includes things like:
- Charities’ fundraising events
- Selling, leasing and letting commercial buildings and land
- education and vocational training
The reason why this area can be a bit of a minefield is because having both taxable activities, and non-taxable activities can make calculating your VAT liabilities hard.
If it incurs VAT on purchases connected to exempt supplies (exempt input tax), your business is partly exempt.
Ordinarily, you can’t reclaim exempt input tax. But, if the amount of exempt input tax is below the de minimis limit (a predefined threshold), it’s fully recoverable.
Why Partial VAT Exemption Exists
There are rules in place to ensure that only VAT related to taxable activities is reclaimed.
To simplify things (and stop a situation arising where you have to endlessly pour over every single transaction), a collection of principles has been created to help businesses calculate their VAT liabilities.
The Benefits of Being Aware of Partial VAT Exemption
Knowing about and getting good quality advice about partial VAT exemption, can have a big impact on your business.
It means that you can make sure you are claiming all the input tax that your business is entitled to. Another benefit is being able to decrease the amount of irrecoverable tax that you are liable for.
The De Minimis Limit
To be below the de minimis limit, both of these conditions have to be met:
- The input VAT attributable to exempt supplies can’t be more than £625 a month.
- The input VAT attributed to exempt supplies can’t be more than 50% of the total input VAT incurred during that quarter.
There are two simpler versions of the above test, which you can use to check whether or not you are within the limit.
The first test is:
- The total VAT is, on average, not more than £625.
- The value of exempt supplies is not more than 50% of the value of all the supplies.
The second is:
- The total input VAT incurred, minus the input VAT directly attributable to taxable supplies is, on average, no more than £625 a month.
- the value of exempt supplies doesn’t come to more than 50% of the value of all supplies.