Partial exemption special methods

By Tolley

The following Value Added Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Partial exemption special methods
  • What is a special method?
  • How do I get approval for a special method?
  • How do I devise a partial exemption special method?
  • How do I deal with input tax relating to foreign and specified supplies?
  • How do I deal with input tax relating to incidental finance?
  • What are business / non-business combined methods?
  • Can retrospective or backdated changes be made to special methods?
  • What if I need to amend my special method or there are gaps in my method?
  • When can HMRC make a ‘direction’?
  • Are annual adjustments necessary in special methods?
  • Does the special method produce a fairer result than the standard method?

This guidance note provides an overview of the use of partial exemption special methods in order to calculate the amount of recoverable residual input tax.

What is a special method?

Where a business does not believe that the standard method described in the Partial exemption standard method guidance note is a fair way for apportioning its input tax, it may seek to agree a special method with HMRC. A special method is any other method than the standard method.

SI 1995/2518, reg 102; PE33000; 2006/112/EC, Article 173(2)(c) ; De Voil Indirect Tax Service V3.462; HMRC Notice 706 

A special method needs to be approved in writing by HMRC before it can be used by a partly exempt business to calculate the amount of recoverable input tax. Special methods can be unique to a business and designed to deal with its particular type of activity or set of activities.

SI 1995/2518, reg 102(1A); HMRC Notice 706 , para 6.2

Since 1 January 2011, it has been possible to use a combined special method which deals not only with partial exemption but also with apportionment of VAT incurred in relation to business and non-business activities.

SI 1995/2518, reg 102ZA; HMRC Notice 706 , para 7.1

The following provide examples of when a business may need to use a special method:

  • Example 1
  • Example 2
  • Example 3
  • Example 4
How do I get approval for a special method?

Businesses wishing to start using a special partial exemption method, or change their existing partial exemption method, must obtain approval from HMRC. The business should contact HMRC providing a full explanation of how the proposed method will

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