If the amount of input tax incurred in respect of exempt supplies is insignificant businesses are entitled to recover than input tax. This amount is known as the de minimis limit. There are two tests – simplified tests and the original test that can be used to determine the de minimis limit. Under the original test, businesses will be viewed a fully taxable where in any period or longer period the value of the exempt input tax is not more than £625 per month on average or half of the business' input tax in the relevant period. There are two simplified tests can alleviate the need for businesses to carry out a full partial exemption calculation.
Test 1 - 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.
Test 2 – 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 two simplified tests compliment the original test and if the business satisfies any of the tests it will be treated as fully taxable for that period. The business must undertake a calculation for each VAT return period and an annual calculation to confirm that the input tax remains under the de minimis.
There is also an annual de minimis test that can be used by qualifying businesses to apply the de minimis test once a year, instead of 4 or 5 times a year (depending on when a business decides to account for its annual adjustment). The annual test enables a business that was de minimis in its previous partial exemption year to treat itself as de minimis in its current partial exemption year. As a result, it can provisionally recover input tax relating to exempt supplies in each VAT period, saving the need for partial exemption calculations. The business will need to complete a calculation to confirm that it was de minimis in that partial exemption year and if fails the test it will need to undertake a partial exemption calculation to determine what input tax is recoverable and repay the input tax that was directly attributable to exempt supplies.