Annual adjustments (longer period adjustments)

By Tolley

The following Value Added Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Annual adjustments (longer period adjustments)
  • What is an annual adjustment?
  • What period does the adjustment cover?
  • How do I calculate the annual adjustment?
  • When must I declare the annual adjustment?
  • What can longer period adjustments not be used for?

This note provides an overview of the rules regarding partial exemption annual adjustments or longer period adjustments. This note should be read in conjunction with the Partial exemption standard method and Partial exemption special methods guidance notes.

SI 1995/2518, regs 99, 107(1), (2); PE37000; De Voil V3.466 (subscription sensitive); VATA 1994, s 26(1)
What is an annual adjustment?

A business will normally be required to undertake a partial exemption calculation each VAT return period in order to provisionally determine the amount of recoverable input tax incurred during that period. At the end of the tax year (or other longer period), the business will be required to redo the partial exemption calculation using the figures for the whole tax year / longer period in order to calculate the actual amount of recoverable input tax for the whole period. The annual adjustment also allows the business to:

  • review the actual use of the goods and services over the longer period
  • review whether the exempt input tax incurred over the longer period was under the de minimis limit
What period does the adjustment cover?

Under normal circumstances, the annual adjustment covers a business’s tax year but in certain instances, it will cover a different longer period which is shorter than 12 months.

Tax year

A tax year is a 12-month period and normally ends on the 31 March, 30 April or 31 May depending on the VAT return periods allocated to the business. For businesses that render monthly VAT returns, their tax year ends on the 31 March.

SI 1995/2518, reg 99(1)(d), (e); PE37200

Many businesses elect to have a VAT return stagger that matches their financial year-end. HMRC will normally agree to

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