The following Value Added Tax guidance note by Tolley provides comprehensive and up to date tax information covering:
This is the standard method which can be used by partly exempt businesses to determine the amount of recoverable VAT incurred on general overheads and other costs that are used to make both taxable and exempt supplies. This note should be read in conjunction with the following guidance notes:
Partly exempt businesses have to use the standard method to determine how much VAT they can recover unless they have received permission to use a special method from HMRC. However, they are also under an obligation to ensure that the standard method provides a ‘fair and reasonable result’. If it does not, the business then they may be forced to make an adjustment under the ‘standard method override’. It is open to businesses to agree a special method of VAT recovery with HMRC if they do not think the standard method produces a fair result.
The first stage of the standard method is to identify inputs that are either exclusively related to taxable supplies or exclusively related to exempt supplies. The input VAT incurred solely for use in making taxable supplies can be recovered in full. The input VAT that is incurred solely for use in making exempt supplies is treated as irrecoverable (subject to the de minimis limits described in the Partial exemption de minimis limit guidance note). This process is known as ‘direct attribution’.
The remaining VAT which cannot be directly attributed to either exclusively exempt or exclusively taxable activities is known as ‘residual’ VAT. It is
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