Value Added Tax

Partial exemption ― annual adjustments (longer period adjustments)

Produced by Tolley
  • 06 Apr 2022 18:13

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

  • Partial exemption ― annual adjustments (longer period adjustments)
  • What is an annual adjustment?
  • What period does the adjustment cover?
  • Tax year
  • Other longer periods
  • How do I calculate the annual adjustment?
  • When must I declare the annual adjustment?
  • Practical points ― annual adjustments

Partial exemption ― annual adjustments (longer period adjustments)

This guidance note looks at partial exemption annual adjustments and longer period adjustments.

For an overview of partial exemption more broadly, see the Partial exemption ― overview guidance note. See also in particular the related Partial exemption ― standard method and Partial exemption ― special methods guidance notes.

For in-depth commentary on the legislation and case law in this area, see De Voil Indirect Tax Service V3.466.

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 (see, for example, the discussion of provisional recovery in the Partial exemption ― standard method guidance note).

At the end of the tax year (or other longer period), a business is 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. Where there is a difference between what is calculated as recoverable for the whole period and what was actually recovered during the period then an adjustment is made for the difference. The annual adjustment also allows the business to:

  1. review the actual use of the goods and services over the longer period

  2. review whether the exempt input tax incurred over the longer period was under the de minimis limit

SI 1995/2518, regs 99, 107(1), (2); PE37000; Notice

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