VAT partial exemption update
Tax alert July 2009
A business that is partly exempt is restricted on the amount of input tax it can claim (it can only claim input tax on costs relevant to taxable sales). The key challenge is to identify how much input tax can be claimed on general overhead items, ie those expenses that are relevant to both the taxable and exempt activities of the business.
Input tax on expenditure that relates to both taxable and exempt activities is known as ‘residual input tax.’ The amount of residual input tax claimed is usually based on the standard method of calculation (an apportionment based on income) unless a special method is in place.
If you are affected by the Partial Exemption rules we suggest you give us a call. The goal posts have been moved!
The actual changes are beyond the scope of this alert but most of the changes simplify the process – it’s worth taking a fresh look at the method of calculation.
If your business fits one of the criteria below one of the changes is compulsory. It relates to businesses that make:
- supplies of services to customers outside the UK; or
- certain financial supplies such as shares and bonds; or
- supplies from establishments located outside the UK
Don’t forget that many partly exempt businesses will be able to reclaim all of their input tax, including input tax relevant to exempt supplies, if they are classed as deminimis as far as partial exemption is concerned.
The deminimis limits are as follows:
- total exempt input tax is less than £7,500 in a partial exemption tax year (£1,875 in a VAT quarter); and
- exempt input tax is less than 50% of total input tax
