Value Added Tax

Partial exemption ― overview

Produced by Tolley
  • 05 Nov 2021 12:01

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

  • Partial exemption ― overview
  • What is partial exemption?
  • Key issues
  • Related reading

Partial exemption ― overview

This guidance provides an overview of the topic of partial exemption.

For an A to Z of key terms associated with partial exemption, see the A to Z of partial exemption guidance note.

For in-depth commentary on the legislation and case law on partial exemption, see De Voil Indirect Tax Service V3.460.

A video overview of partial exemption can be found below:

  1. Partial exemption (A)

  2. Partial exemption (B)

  3. Partial exemption (C)

What is partial exemption?

A business that makes both taxable and exempt supplies is partly exempt. Broadly, VAT on costs related (or ‘attributable’) to taxable supplies is recoverable whilst VAT incurred on costs related to exempt supplies is irrecoverable (subject to some de minimis rules for negligible amount of exempt input tax). Partial exemption methods exist so that businesses can apportion their input tax between costs used for taxable activities (where VAT is recoverable) and costs used for exempt activities (where VAT is irrecoverable). Partial exemption methods can also cover non-business activities on which VAT is generally also irrecoverable.

HMRC’s published guidance on partial exemption can be found in Notice 706 and its Partial Exemption manuals. HMRC also publishes a Partial exemption toolkit which provides guidance for businesses and advisers dealing with partial exemption issues.

Key issues

A number of key issues arise in relation to partial exemption. The table below sets out a number of the most important areas to consider, along with links to more detailed guidance:

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