Partial exemption—special methods

V3.462 Special method

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.

In Finanzamt Hildesheim v BLC Baumarkt, it was held that Directive 77/388/EEC, art 17(5)5:

'must be interpreted as allowing Member States, for the purposes of calculating the proportion of input value added tax deductible for a given operation, such as the construction of a mixed-use building, to give precedence, as the key to allocation, to an allocation key other than that based on turnover appearing in Article 19(1) of that directive, on condition that the method used guarantees a more precise determination of the said deductible proportion'.

Such a method is frequently referred to as a 'special method'. HMRC normally allows use of a special method if it provides a fair and reasonable allocation of input tax to taxable supplies6.

Two cases provide examples of special methods which HMRC considered had ceased to give a fair and reasonable attribution. In Aspinall's Club7, it was held that attribution on the basis of the floor area of a casino was distortive. In Standard Life Assurance Co8 the Tribunal rejected HMRC's claim that a special method did not produce a 'fair and reasonable recovery'. The Tribunal allowed the company's appeal in principle, finding that the claims were in keeping with the terms of the agreed special method and holding that the agreed

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