Partial exemption standard method

Produced by Tolley
Partial exemption standard method

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

  • Partial exemption standard method
  • Standard method
  • Direct attribution and ‘residual’ VAT
  • Provisional recovery of residual VAT under the standard method
  • Option 1 ― values based method
  • Supplies excluded from the values based calculation
  • Option 2 ― in-year provisional recovery rate (prior year percentage)
  • Option 3 ― use-based option for new partly exempt businesses
  • Percentage rounding
  • Incidental supplies
  • More...

IP COMPLETION DAY: 11pm (GMT) on 31 December 2020 marked the end of the Brexit transition / implementation period entered into following the UK’s withdrawal from the EU. At this point in time, key transitional arrangements came to an end and significant changes began to take effect across the UK’s VAT and customs regime. This document contains guidance on subjects potentially impacted by these changes. Before continuing your research, see the Brexit — overview guidance note.

This is the standard method which can be used by partly exempt businesses to determine the amount of recoverable VAT incurred on general overheads and other costs that are used to make both taxable and exempt supplies. This note should be read in conjunction with the following guidance notes:

  1. Partial exemption overview

  2. Change of use ― payback and clawback

  3. Annual adjustments (longer period adjustments)

Standard method

Partly exempt businesses have to use the standard method to determine how much VAT they can recover unless they have received permission to use a special method from HMRC. However, they are also under an obligation to ensure that the standard method provides a ‘fair and reasonable result’. If it does not, the business then they may be forced to make an adjustment under the ‘standard method override’. It is open to businesses to agree a special method of VAT recovery with HMRC if they do not think the standard method produces a fair result.

Direct attribution and ‘residual’ VAT

The first stage of the standard method is to identify inputs that are either exclusively related to taxable supplies or exclusively related to exempt supplies. The input VAT incurred solely for use in making taxable supplies can be recovered in full. The input VAT that is incurred solely for use in making exempt supplies is treated as irrecoverable (subject to the de minimis limits described in the Partial exemption de minimis limit guidance note). This process is known as ‘direct attribution’.

The remaining VAT which cannot be

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