Chapter 10 - Partial Exemption

Question 1

Introduction

Answer 1

Partially exempt business is one that makes taxable and exempt supplies. This creates an issue over input tax
Initially the trader needs to identify input tax used specifically for taxable supplies (recoverable) and tax used for exempt supplies - this is ‘direct attribution’.
Some tax can’t be directly attributed as it could relate to both supplies, this is residual input tax and special rules exist to determine how the input tax is allocated

Question 2

Standard Method

Answer 2

Thee bases of calculation:
1) Values-based
2) Use-based
3) Use of the previous year's recovery percentage
Trader must choose the most appropriate

Question 3

Values Based

Answer 3

Taxable supplies (excl VAT) / Total supplies (excl VAT)
Expressed as a % rounded up to the next whole number. % applied to residual input tax.

Question 4

Use Based

Answer 4

Usually used for new partially exempt businesses where the proportion of taxable to total supplies under value based is not representative of the use to which these inputs are put

Question 5

Prior Year

Answer 5

Business may use the PY % to determine the provision recovery of residual input tax in each VAT return.

Question 6

De Minimis Input VAT

Answer 6

It’s possible to reclaim input VAT relating to exempt supplies if the amounts received are below the de minimis amount:
£625 p/m, ie £1,875 p/q, ie £7,500 p/y
And not more than 50% of total input tax

Question 7

De Minimis Test

Answer 7

Simplified test 1: total input tax is no more than £625 a month on average and value of exempt supply is no more than 50% of the value of all supplies

Simplified test 2: total input tax incurred less input tax directly attributable to taxable supplies is no more than £625 a month on average and the value of exempt supplies is no more than 50% of the value of all supplies

Question 8

Annual Adjustment

Answer 8

At the end of the VAT year, an annual calc must be done. Same calc as quarterly, just using annual supplies and input tax figures.
Difference between annual figure and totalled quarterly figures is the annual adjustment.
Accounted for on the first VAT return of the new VAT year. You can also do it on the final VAT return of the year instead