Commentary

V16.896 VAT—partial exemption—fair recovery of VAT on costs of incidental financial supplies

Part V16 Forms and other HMRC material

V16.896 VAT—partial exemption—fair recovery of VAT on costs of incidental financial supplies

V16.896 VAT—partial exemption—fair recovery of VAT on costs of incidental financial supplies

Information Sheet 9/04, 2 December 2004

This Information Sheet explains, with examples, how the changes announced in the pre-Budget Report by the Chancellor on 2 December 2004, affect the amount of VAT businesses can claim in respect of exempt incidental financial supplies, such as most share issues. The terms used here are explained in Notice 706 “Partial exemption” (Part V8).

Businesses will only be affected by these changes as and when they incur input tax in respect of incidental financial supplies. These are explained below. The changes do not affect the entitlement to recover VAT, but merely the basis by which recoverable VAT is to be calculated.

The changes take effect from 3 December 2004.

1. Background

A basic principle of VAT is that input tax that is incurred on purchases used to make taxable supplies is recoverable, whereas input tax that is incurred on purchases used to make exempt supplies is not recoverable.

Supplies of shares and other incidental financial supplies are exempt from VAT when made to anyone based in the UK, or when made to someone in a private capacity based elsewhere in the EU. VAT incurred on the costs used to make such supplies is exempt input tax and cannot be recovered.

Incidental financial supplies made to businesses based within the EU are not subject to VAT. VAT incurred on the costs used to make such supplies is also exempt input tax and cannot be recovered.

Financial supplies made to individuals or

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