VAT Partial Exemption Calculation

Hi, How should we apportion the input VAT in periods where there is no sales Thanks,

https://www.gov.uk/guidance/partial-exemption-vat-notice-706 Section 4 is worth reading as you do not state if you are a new business using partial exemption for the first time or if you are an existing business with a history of partial exemption If you are already partially exempt, see section 4.5 which states that you can use last years partial exemption percentages for VAT periods where there are no sales and that you must then perform an annual adjustment. If you are a new business, then section 4.6 explains what you should do.

Hi Fatiha,
You should account for the wholly attributable (exempt and taxable) input tax in the normal way.
If you are not making taxable supplies in a quarter and are operating the PE standard method then that will potentially skew the Partial Exemption recovery rate.
Taxable supplies over total supplies when both figures are zero will give a zero recovery rate for your residual which would only be resolved at the end of year annual adjustment.
However, if you look at section 4.5 of the PE VAT Notice (706):
https://www.gov.uk/guidance/partial-exemption-vat-notice-706#section4
which states:
For VAT Returns for periods beginning on or after 1 April 2009, you can use your previous year’s recovery percentage to determine your provisional recovery of residual input tax in each period. This is then finalised by way of an annual adjustment. The finalised annual recovery percentage is then used as the provisional recovery percentage for the next year and so on, saving the need to calculate separate recovery percentages for each period.
Therefore, you should be provisionally use the previous years recovery percentage and apply that to the four quarters for this year. Then at the end of the year you should undertake a longer period (annual) adjustment and then account for any difference between the two.
Thank you.

Hi thanks for this. The business is a new business with the exempt part already operational and generating income but the taxable part is still being developed ( the building). Can we still use the standard method and recover all the input VAT relating to the refurbishment of the taxable building even though it is still not generating income as of yet ? or is there another method we should be using. I would really appreciate quick response. Thank you

Hi Fatiha,
Please see the guidancce below:
Direct attribution of input tax is the identification of VAT incurred on purchases that you use, or intend to use exclusively in making:
Taxable supplies or other supplies that carry the right to deduct
Exempt supplies
This process should be carried out on the basis of the use you make, or intend to make of those purchases. Attribution is undertaken at the time you receive the purchases.
3. How to calculate how much input tax you can recover
Thank you.

On what basis would you reclaim ALL the VAT (100%) when you clearly know that you are making exempt supplies already? If you did not have any exempt income and had not developed your business plan, then there could be an argument that as your intention is not known you reclaim all of the input tax initially and then repay a proportion back, but as you do know you are making exempt supplies then to argue you are entitled to 100% of VAT recovery makes little sense. Even if you do choose to reclaim 100% of the VAT, you are aware that there is an annual adjustment which must be performed and may see previously reclaimed input tax paid back to HMRC. If the cost of the refurbishment is over £250k net then you will also need to perform Capital Goods Scheme (CGS) calculations, each year for 10 years which may further adjust any input tax you reclaim initially and throughout the 10 years life cycle of the property. Same link as HMRC, section 4, specifically section 4.6 which looks at intention but you are past the intention stage as you are only making exempt supplies. HMRC will inspect the first return, they will see you are making exempt sales because Box 6 will have net sales value and no output tax in Box 1 so you should be prepared to defend whatever position you take in terms of input tax recovery, remember that the right to reclaim VAT is on the basis you make taxable supplies....what happens if your taxable part of the business is still in development 1 year from now, or 2 years from now? This is the sort of thing you should be speaking to your Accountant about.