Partial exemption – special methods

V3.462 Special method

Introduction

Regulations1 made under VATA 1994 s 26(1) provide that HMRC may approve or direct2 use of a method other than the standard method3 for calculating the amount of input tax which is attributable to taxable supplies4. Such a method is frequently referred to as a “special method”. HMRC normally allow use of a special method if it provides a fair and reasonable allocation of input tax to taxable supplies5.

It would appear that a special method is intended only to deal with the question of residual input tax; it remains necessary, where possible, to directly attribute input tax to taxable and exempt supplies6.

In determining whether a special method provides such a fair and reasonable attribution, it is not necessary, and serves no purpose, to use the standard method as a comparator. In Lok'nStore7, the tribunal said “HMRC contend that the level of taxable income to total income is generally a good measure of the economic use of goods and services. The greater the level of taxable income, the greater the economic use of the overhead costs in making taxable supplies. Equally, the greater the level of exempt income, the greater the use of the overhead costs in making exempt supplies. In our view, that proposition only holds good where the relationship between the overhead costs and the income from the taxable and exempt supplies is, broadly, the same. If the costs of goods and services used to make exempt supplies are

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