Types of partial exemption special methods

By Tolley

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

  • Types of partial exemption special methods
  • Sectorised methods
  • Allocation under a sectorised method
  • Apportionment under special methods

This guidance note looks at several of the most common ways that a partial exemption special method may operate in order to calculate the amount of VAT that can be recovered on costs that do not relate exclusively to either taxable or exempt activities. It should be read in conjunction with the Partial exemption special methods guidance note.

Sectorised methods

Sometimes it will make sense to split a business into separate parts as there is not a single method which would fairly apportion residual input tax across all areas of the business. Each different part or ‘sector’ then calculates its own residual recovery rate in a way that is appropriate for how residual costs are used in that sector. Such a method is commonly known as a ‘sectorised’ approach.

SI 1995/2518, reg 102(1A)(d); HMRC Notice 706 , para 6.4; PE22000; 2006/112/EC , Article 173(2)A, (3)B

Each sector in a sectorised method must reflect the following:

  • the use made of the goods and services in that sector
  • the structure of the business
  • the type of activity undertaken by that sector

SI 1995/2518, reg 102(1A)(d)

HMRC states that a sectorised method will only be appropriate when the additional burden of separate calculations (for both the business and HMRC) is offset by the additional accuracy the method provides.


HMRC’s internal guidance suggests that it will normally only accept a sectorised method when a business has separate accounts based on established accounting principles for each sector. Separate accounts may mean completely separate accounts or a single set of accounts with clearly allocated costs. In exceptional circumstances, it may accept a sectorised approach even when there are not separate accounts if evidence can be provided that the method will allocate costs fairly.

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