RCB/4/21 Partially exempt VAT registered businesses affected by coronavirus (COVID-19)
Revenue & Customs Brief, Issue 4. 23 March 2021
Purpose of this brief
This brief outlines an accelerated process for VAT registered businesses to request temporary alterations to their partial exemption methods (including combined methods) to reflect changes to their business practices because of the coronavirus (COVID-19) pandemic.
Who needs to read this
Partially exempt businesses whose trading activities have been affected by coronavirus, as a result of which their existing partial exemption method does not provide a fair and reasonable result.
Businesses who make a mixture of taxable and exempt supplies can only recover input tax to the extent that it is used in making taxable supplies. Residual input tax (VAT incurred on purchases used to make both taxable and exempt supplies) must be apportioned using a fair and reasonable method to calculate the percentage which is recoverable.
The standard method, based on the value of taxable supplies made as a proportion of all supplies made by the business, is the default method. A Partial Exemption Special Method (PESM) may, however, be used if HMRC is satisfied that it would produce a fairer reflection of the use of residual input tax than the standard method. Proposed PESMs must be approved by HMRC before they can be used.
Businesses using the standard method may, in any given tax year, find that their actual deductible input tax differs significantly from that calculated based on the use of input tax in making taxable