If the amount of input tax incurred by a business in respect of exempt supplies ('exempt input tax') is insignificant, the business may be regarded as fully taxable (ie the input tax may be recovered in full). The de minimis limit is the threshold below which the exempt input tax is regarded as insignificant. The main test for the de minimis limit is supplemented by two simplified tests; if either simplified test is passed, there is no need to apply the main test.
Simplified test 1 - the input tax is de minimis if the total input tax is no more than £625 on average and the value of exempt supplies is no more than 50% of the value of all supplies.
Simplified test 2 – the input tax is de minimis if the total input tax incurred less input tax directly attributable to taxable supplies is no more than £625 per month on average and the value of exempt supplies is not more than 50% of all supplies.
The main test- the input tax is de minimis if exempt input tax is not more than £625 per month on average, and not more than half of the total input tax.
The test(s) should be applied to each VAT accounting period. It is also necessary to apply the main test at the end of the partial exempt accounting year to even out any fluctuations during the year. If the annual test is passed, the business may recover any input tax which was was not de minimis in a particular accounting period. Conversely if the annual test is failed, any input tax which was treated as de minimis in a particular accounting period must be repaid to HMRC.
A business that was de minimis in one year may provisionally regard itself as de minimis in the following year. As a result, it can provisionally recover all its input tax in each VAT period, saving the need to apply the de minimis tests for each period. The business will still need to apply the de minimis test at the end of its partial exemption year and make any necessary adjustment.