Partial exemption ― special methods

Produced by Tolley

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

  • Partial exemption ― special methods
  • What is a special method?
  • How do I get approval for a special method?
  • Making a declaration
  • Refusing approval
  • De facto approval and old special methods
  • How do I devise a partial exemption special method?
  • What a special method must cover
  • Percentage rounding
  • Incidental and distortive supplies
  • More...

Partial exemption ― special methods

This guidance note provides an overview of the use of partial exemption special methods in order to calculate the amount of recoverable input tax.

For an overview of partial exemption more broadly, see the Partial exemption ― overview guidance note.

For in depth commentary on the legislation and case law, see De Voil Indirect Tax Service V3.462.

What is a special method?

Where a business does not believe that the standard method described in the Partial exemption standard method guidance note is a fair way for apportioning its input tax, it may seek to agree a fairer special method with HMRC. A special method is any other method than the standard method.

A special method needs to be approved in writing by HMRC before it can be used by a partly exempt business to calculate the amount of recoverable input tax. Special methods can be unique to a business and designed to deal with its particular type of activity or set of activities.

It is possible to use a combined special method which deals not only with partial exemption but also with apportionment of VAT incurred in relation to business and non-business activities.

The question of whether a special method is fairer that the standard method will not necessarily be a straight forward one. For example, in one Tribunal case a company proposed a method based on floor-space which HMRC disputed was fairer than the standard method. The Tribunal ultimately sided with the company but HMRC was keen to suggest that the decision could not be applied widely.

Unsurprisingly, HMRC is likely to be most resistant to special methods which end up with businesses being able to recover significantly more input tax than they would be entitled to under the standard method.

The following provide examples of when a business may need to use a special method:

  1. Example 1

  2. Example 2

  3. Example 3

  4. Example 4

How do I get approval for a special method?

Businesses wishing

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