Businesses making both taxable supplies and exempt supplies may not be able to recover all of their input VAT. Indeed, one of the conditions for recovering input VAT is that there is a direct and immediate link to a business’ taxable supplies or a clear intention to make taxable supplies.
Partial exemption is commonly associated with businesses in the health, property and finance sectors and calculations must be made on a quarterly basis to determine how much input VAT should be recovered / disallowed in each quarter. It is also a requirement to compute an annual adjustment for the respective VAT year. Upon calculating the annual adjustment, some of the VAT disallowed in the previous VAT year may be recoverable or there may be VAT payable to HMRC.
Partially exempt businesses will be familiar with the fact that to be De Minimis, the total input tax relating to exempt supplies must be less than or equal to £625 per month on average and less than 50% of total input tax. Most partially exempt businesses apply the standard method (net taxable sales / net total sales) when calculating their input tax recovery position but there are other special methods that can be used such as methods linked to floor space. Approval from HMRC is required if a business would like to apply a special method.
Please contact the VAT department at AEL on 020 7433 6946 for more advice on saving VAT and operating partial exemption.