Commentary

V7.345 Partial exemption—potential problems with allocation of input tax

Part V7 Tax planning
Part V7 Tax planning | Commentary

V7.345 Partial exemption—potential problems with allocation of input tax

Part V7 Tax planning | Commentary

V7.345 Partial exemption—potential problems with allocation of input tax

One of the key skills for an accountant dealing with a partly exempt business is to be very clear about the correct way of allocating purchase invoices to one of the three categories of input tax, ie taxable, exempt or residual.

In most cases, the allocation process is straightforward – but in a commercial situation, there can be certain expenses that need to be very closely analysed. For example, if a business has 80% exempt income, then the decision to post a purchase invoice to residual input tax rather than taxable input tax will cost the company £800 if the total VAT on the invoice is £1,000.

See Example 3 for some interesting allocations.

Example 3

Nortons Golf Club is a partly exempt business (non-profit making golf club with exempt income from playing subscriptions and taxable income from a bar and restaurant). It has a clubhouse where the ground floor is allocated to changing room facilities for the players, and the first floor is allocated to a purpose built bar and restaurant. The club has two sources of income – membership subscriptions paid by cheque or direct debit, and bar or restaurant sales paid by cheque, cash or credit/debit card.

It incurs the following expenses in the period to 30 June:

  1.  

    •     the disabled lift that takes customers from the ground floor to the first floor bar area has been serviced at a cost of £2,000 plus VAT

  2.  

    •     the club has just bought a safe

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