TT246: VAT partial exemption calculations

We are now past the VAT year end period – depending on the VAT quarter stagger of the business, VAT year ends are March, April or May.

For partially exempt businesses, who make both exempt and taxable supplies, this is the period in which the partial exemption annual adjustment needs to be made.

Input VAT relating directly to exempt supplies is not reclaimable, whereas input VAT relating directly to taxable supplies is reclaimable in full. In partially exempt businesses, each quarter an adjustment to apportion the input VAT on inputs not directly relating to either exempt or taxable supplies (residual VAT) is made. There are apportionment rules for how this should be split, and a de minimis limit under which the exempt/residual input VAT can be reclaimed in total.

It is therefore vital for businesses in this position to ensure that they are aware of the requirement for quarterly and annual review and adjustment.

This situation is often applicable for businesses that sell or let property in addition to making taxable supplies. Property is often VAT exempt for these supplies, unless certain conditions are met, such as that the property has been opted to tax (usually only in commercial properties) or the property is to be developed as a new-build dwelling, as the first grant of a major interest is zero-rated in this case. VAT rules in this area are complex and require careful consideration.

At the VAT year end the apportionment adjustment must be reviewed for the tax year as a whole. The resulting adjustment must be made either in the final quarter’s return of the VAT year or the quarter’s return following this (the timing will depend on how quickly the calculation can be done, as well as whether it is a reclaim or a payment).

If you are not sure if your business needs to perform this test, or would like more information or guidance, please contact your Barnes Roffe partner.

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