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 a special method is
  • How to get approval for a special method
  • How to devise a partial exemption special method
  • Input tax relating to foreign and specified supplies
  • Input tax relating to incidental finance
  • Business / non-business combined methods
  • Retrospective and backdated changes to special methods
  • Amendments and gaps in special methods
  • When HMRC can make a direction
  • Annual adjustments
  • Whether a special method produces 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 a special method is

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 (subscription sensitive); 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 to 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 operate. The Checklist ― partial exemption special method application provides

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