The following Value Added Tax guidance note Produced by Tolley provides comprehensive and up to date tax information covering:
This guidance note looks at several of the most common ways that a partial exemption special method may operate in order to calculate recoverable VAT.
For special methods generally, see the Partial exemption special methods guidance note. For an overview of partial exemption more broadly, see the Partial exemption ― overview guidance note.
In depth commentary on legislation and case law can be found in De Voil Indirect Tax Service V3.462.
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.
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.
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.
Under a sectorised method, it is seen as good practice to have one sector to deal with any input tax incurred that is not otherwise dealt with by the other sectors. This will help, for example, where new or unusual
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