Where a business makes both taxable and exempt revenue, not all input VAT can be recovered, and the calculations for it must accurately reflect how costs are used across the business. Major shifts in how a business operates can materially alter recovery percentages, too. For example, new revenue streams that may be exempt from VAT recovery will complicate what can be recovered. Partial exemption issues often arise without being immediately visible in sectors such as health, education, and financial services. Regardless of what is or isn’t recoverable, HMRC expects the method used to be fair and reasonable and may challenge results that distort the true financial position of the business. Regular reviews carried out by experts reduce the risk of cumulative under- or over-claims.
When it comes to WR Partners, I absolutely trust their judgement, and I trust that they are there to help us.
Nick Evans, Cymryd Rhan
Our team assesses how input tax is directly attributed between taxable, exempt, and residual categories to ensure that costs are being allocated correctly. Your existing residual input VAT apportionment method is tested to confirm that the results accurately reflect business use rather than simply turnover values. We’ll also evaluate whether the Standard Method Override may apply in instances where the default method produces a materially distorted result. De minimis calculations are also reviewed to confirm that exempt input VAT thresholds are applied correctly and consistently across different supplies. Annual adjustment workings are examined to identify exposure, historic correction requirements, or recovery opportunities. Where appropriate, we may consider whether a Partial Exemption Special Method would produce a more accurate and commercially fair outcome.
For many businesses, the standard turnover-based method is appropriate. However, this approach can produce inequitable outcomes in instances where sales values do not reflect resource usage. In these cases, HMRC may require the Standard Method Override to be applied, or a business may need to seek approval for a Partial Exemption Special Method (PESM). This special method must demonstrate that it is fair, reasonable, and capable of practical administration. While this sounds like a lot to consider, our team will advise on the suitability of your current method and support discussions or formal applications with HMRC if a revised approach is required.
A business is partially exempt when it makes both taxable and VAT-exempt supplies that restrict its ability to recover all input VAT.
If exempt input VAT falls below specific monetary and percentage thresholds, it may be fully recoverable. Accurate testing is essential to avoid adjustments later down the line.
A PESM is an HMRC-approved alternative calculation used where the standard method doesn’t produce a fair and reasonable result.
At least annually and whenever there is a significant change in turnover mix, cost base, or business structure.
We love meeting new, exciting businesses. Get in touch with our team to see how we could enhance and protect your financial position.
Or if you’d prefer to speak to someone directly just give us a call on: 08000 664 664 or email: hello@wrpartners.co.uk.
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