V7.347 Partial exemption—de minimis limits
The calculations made so far in this section have worked on the basis that all exempt input tax is not reclaimed by a business, plus a proportion of residual input tax based on the value of taxable and exempt income. In other words, a partly exempt business always suffers some loss of input tax.
One important rule of partial exemption is that a business can reclaim all of its input tax if the total value of exempt input tax (and remember, exempt input tax also includes the proportion of residual input tax that is not reclaimed) is less than the following amounts:
• £625 per month on average and £7,500 per year, and
• 50% of the total input tax
Note – on 1 April 2010, two new de minimis tests were introduced, and also the opportunity for a business to treat itself as de minimis throughout a tax year if it was de minimis in the previous tax year. However, in the latter case, an annual adjustment is still needed at the end of the tax year, which could make the business partly exempt and subject to an input tax payback. See below for further analysis of these new regulations.
The quarterly calculations are again superseded by an annual adjustment – so it is possible to have the situation where a business is partly exempt in a VAT quarter but de minimis for the year as a whole.
See Example 5 which gives an example of a business