Residual input tax is input tax which cannot be attributed exclusively to making either taxable or exempt supplies. Residual input tax includes input tax which is used to make both taxable and exempt supplies and input tax which is not specifically attributable to any supply, but which is used for business purposes (such as business overheads). Residual input tax plays an important role in partial exemption.
A proportion of residual input tax needs to be attributed to taxable supplies and this VAT is generally recoverable by a VAT registered person. Similarly, a proportion of residual input tax needs to be attributed to exempt supplies and this will not generally be recoverable. Under the standard method of partial exemption, the attribution is performed by using either the ‘values-based method’ or the ‘use-based method’.
Residual input tax is sometimes also referred to as non-attributable input tax. It is to be contrasted with 'directly attributable' input tax which is VAT used exclusively to make either taxable or exempt supplies.