Partial exemption ― standard method

Produced by Tolley

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

  • Partial exemption ― standard method
  • What is the 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...

Partial exemption ― standard method

This guidance note covers the standard method for determining VAT recovery under partial exemption.

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 V3.461.

What is the standard method?

The standard method is the default way that a partly exempt businesses (ie a business which makes a mixture of taxable and exempt supplies) must determine how much VAT it can recover on costs.

At a very high level the standard method can be divided into two steps:

  1. the ‘direct attribution’ of input tax

  2. the apportionment of ‘residual input tax

As well as these two steps, businesses will also need to consider whether they qualify for full VAT recovery under the partial exemption ‘de minimis’ rules (see the Partial exemption de minimis limit guidance note). 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’ (see later in this guidance note).

It is open to businesses to agree a bespoke special method of VAT recovery with HMRC if they do not think the standard method produces a fair result (special methods are covered in the Partial exemption special methods guidance note).

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 directly attributed to either exclusively

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