View the related Tax Guidance about Residual input tax
Partial exemption ― special methods
Partial exemption ― special methodsThis guidance note provides an overview of the use of partial exemption special methods in order to calculate the amount of recoverable input tax.For an overview of partial exemption more broadly, see the Partial exemption ― overview guidance note.For in depth commentary on the legislation and case law, see De Voil Indirect Tax Service V3.462.What is a special method?Where a business does not believe that the standard method described in the Partial exemption standard method guidance note is a fair way for apportioning its input tax, it may seek to agree a fairer special method with HMRC. A special method is any other method than the standard method. A special method needs to be approved in writing by HMRC before it can be used by a partly exempt business to calculate the amount of recoverable input tax. Special methods can be unique to a business and designed to deal with its particular type of activity or set of activities. It is possible to use a combined special method which deals not only with partial exemption but also with apportionment of VAT incurred in relation to business and non-business activities. The question of whether a special method is fairer that the standard method will not necessarily be a straight forward one. For example, in one Tribunal case a company proposed a method based on floor-space which HMRC disputed was fairer than the standard method. The Tribunal ultimately sided with the company but HMRC was keen to
Exemption ― finance ― dealing in money, credit and debts
Exemption ― finance ― dealing in money, credit and debtsDue to the complex nature of financial services and the number of different types of transactions that are possible, the subject of exempt finance has been covered in a number of guidance notes. This guidance note provides an overview of the VAT treatment of financial services transactions involving dealing in money, credit and debts within the UK. If financial services are provided to customers located in other countries, then the Reverse charge ― buying in services from outside the UK guidance note may be of further assistance. Under VATA 1994, Sch 9, Pt II, Group 5, Item 1, the following supplies are exempt from VAT:‘The issue, transfer or receipt of, or any dealing with, money, any security for money or any note or order for the payment of money.’However, note that under VATA 1994, Sch 8, Pt II, Group 11, Item 1, the issue by a bank of a note payable to the bearer on demand is zero-rated; see De Voil Indirect Tax Service V4.279.The exemption does not cover:•the supply of coins or banknotes as:These supplies are normally liable to VAT on the full selling price, whether or not they are sold for more than their face value. Examples include banknotes, proof coins, Maundy money and precious or base metal coins. However, it may be possible to use the second-hand goods margin scheme for supplies of collectors’ pieces (see the Margin schemes - overview guidance note for more information).
A to Z of partial exemption
A to Z of partial exemptionThere is often a significant volume of technical terminology that is use when discussing partial exemption. The table below provides brief explanations of some of the key terms associated with partial exemption and, where appropriate, links to guidance notes containing further details.TermDefinitionFurther detailsAllocationVAT incurred on purchases is distributed or allocated to a specific sector within a special partial exemption methodPartial exemption ― types of special method and sector specific informationAnnual AdjustmentBusinesses provisionally reclaim VAT on each VAT return calculated using the partial exemption method. At the end of the tax year, a partial exemption calculation is undertaken using all of the figures for the whole tax yearPartial exemption ― annual adjustments (longer period adjustments)ApportionmentThe partial exemption calculation is intended to split the residual input tax between taxable and exempt supplies.
Gold ― investment gold and gold coins
Gold ― investment gold and gold coinsThis guidance note provides an overview of the VAT treatment of supplies of investment gold and gold coins. For supplies of non-investment gold see the Gold ― supplies of non-investment gold guidance note for more information. See the Flowchart ― is the supply of gold within the scope of UK VAT? for further assistance on determining the correct VAT treatment of the transaction.What is investment gold?Supplies of investment gold are exempt from VAT (subject to the option to tax explained below). Investment gold is:•gold with a purity of not less than 995 thousandths supplied either as a bar, wafer or of a weight acceptable to the bullion markets•a gold coin that qualifies as an investment gold coinInvestment gold coinsHMRC has published a list of investment gold coins and included a link to it in the online edition of Notice 701/21A. An investment gold coin is either (a) a coin included in the list published by HMRC that is current at the relevant time, or (b) a gold coin minted after 1800 that meets all of the following criteria:•it is of a purity of not less than 900 thousandths•it is, or has been, legal tender in its country of origin•it is of a description of coin that is normally sold at a price that does not exceed 180% of the open market value of the gold contained in the coinIt is the normal selling price for a particular type
TOGC ― VAT recovery
TOGC ― VAT recoveryThis guidance note looks at VAT recovery issues associated with transfers of a going concern (TOGC).For VAT recovery generally, see the Input tax ― overview guidance note and for an overview of TOGCs more broadly, see the TOGC ― overview guidance note.In-depth commentary on the legislation and case law around TOGCs can be found in De Voil Indirect Tax Service V2.226.Why is VAT recovery an issue when there is a TOGC?As described in the TOGC ― overview guidance note, a TOGC is neither a supply of goods nor services and is therefore outside the scope of VAT. This raises questions over how to treat any VAT on costs associated with the TOGC.The treatment of VAT on costs differs slightly for the seller (transferor) and the purchaser (transferee). The position for each is considered in this guidance note.What kinds of costs are associated with a TOGC?There are often costs associated with a TOGC, common examples of such costs include:•solicitors’ fees•estate agents’ costsNotice 700/9, para 2.5What is the VAT recovery position for the seller?VAT on costs associated with the TOGC is treated as non-attributable or residual for the seller (essentially treated as an ‘overhead’ cost) (see the Partial exemption ― de minimis rules guidance note). The implications of this are summarised in the table below:
Partial exemption ― types of special method and sector specific information
Partial exemption ― types of special method and sector specific informationThis guidance note looks at several of the most common ways that a partial exemption special method may operate in order to calculate recoverable VAT.For special methods generally, see the Partial exemption special methods guidance note. For an overview of partial exemption more broadly, see the Partial exemption ― overview guidance note.In depth commentary on legislation and case law can be found in De Voil Indirect Tax Service V3.462.Type of special method ― Sectorised methodsSometimes it will make sense to split a business into separate parts as there is not a single method which would fairly apportion residual input tax across all areas of the business.. Each different part or ‘sector’ then calculates its own residual recovery rate in a way that is appropriate for how residual costs are used in that sector. Such a method is commonly known as a ‘sectorised’ approach and can be fairly common as a special method.Each sector in a sectorised method must reflect the following:•the use made of the goods and services in that sector•the structure of the business•the type of activity undertaken by that sectorSI 1995/2518, reg 102(1A)(d)HMRC states that a sectorised method will only be appropriate when the additional burden of separate calculations (for both the business and HMRC) is offset by the additional accuracy the method provides. It will normally only accept a sectorised method when a business has separate accounts based on established accounting principles for
Exemption ― finance ― securities
Exemption ― finance ― securitiesThis guidance note covers the VAT treatment of various types of financial securities. SecuritiesThe issue, transfer or receipt of, or any dealing with, any security or secondary security in the UK is exempt from VAT (but see the impact of the Kretztechnik decision in ‘VAT treatment of share issues’ below). For these purposes, a security or secondary security comprises:•shares, stock, bonds, notes (other than promissory notes), debentures, debenture stock or shares in an oil royalty•any document relating to money, in any currency, which has been deposited with the issuer or some other person, being a document which recognises an obligation to pay a stated amount to bearer or to order, with or without interest, and being a document by the delivery of which, with or without endorsement, the right to receive that stated amount, with or without interest, is transferable•any bill, note or other obligation of the Treasury or of a Government in any part of the world, being a document by the delivery of which, with or without endorsement, title is transferable, and not being an obligation which is or has been legal tender in any part of the world•any letter of allotment or rights, any warrant conferring an option to acquire a security included in these provisions, any renounceable or scrip certificates, rights coupons, coupons representing dividends or interest on such a security, bond mandates or other documents conferring or containing evidence of title to or rights in respect
Partial exemption ― de minimis rules
Partial exemption ― de minimis rulesThis guidance note examines the partial exemption de minimis rules. For an overview of partial exemption more broadly, see the Partial exemption ― overview guidance note.In depth commentary on the legislation and case law can be found in De Voil Indirect Tax Service V3.465.What are the partial exemption de minimis rules?Under basic VAT principles, VAT is generally not recoverable on costs where those costs are used to make exempt supplies. However, the partial exemption de minimis rules provide that where certain conditions are met then the input VAT attributable to exempt supplies is deemed to be sufficiently negligible that a business is entitled to recover the input tax it incurs in full without a requirement to restrict input tax recovery. Essentially HMRC accepts that if the amounts are low enough, then full recovery is permissible.The de minimis rules can broadly be divided into the main de minimis test and two ‘simplified’ tests which supplement the main test. These tests set out the limits for determining if restricted input tax is considered low enough to be recovered in full. The main test requires a full partial exemption calculation in order to determine whether its conditions are satisfied and therefore whether input VAT can be recovered in full. In contrast, where one of the simplified tests is satisfied this can avoid the need to perform a full partial exemption calculation whilst still entitling a business to recover VAT to in full on its costs so exists
Partial exemption ― standard method
Partial exemption ― standard methodThis guidance note covers the standard method for determining VAT recovery under partial exemption.For an overview of partial exemption more broadly, see the Partial exemption ― overview guidance note.For in depth commentary on the legislation and case law, see De Voil Indirect Tax Service V3.461.What is the standard method?The standard method is the default way that a partly exempt businesses (ie a business which makes a mixture of taxable and exempt supplies) must determine how much VAT it can recover on costs. At a very high level the standard method can be divided into two steps:•the ‘direct attribution’ of input tax•the apportionment of ‘residual input tax’As well as these two steps, businesses will also need to consider whether they qualify for full VAT recovery under the partial exemption ‘de minimis’ rules (see the Partial exemption de minimis limit guidance note). They are also under an obligation to ensure that the standard method provides a ‘fair and reasonable result’. If it does not, the business then they may be forced to make an adjustment under the ‘standard method override’ (see later in this guidance note).It is open to businesses to agree a bespoke special method of VAT recovery with HMRC if they do not think the standard method produces a fair result (special methods are covered in the Partial exemption special methods guidance note).Direct attribution and residual VATThe first stage of the standard method is to identify inputs that are either exclusively related to
Partial exemption ― related issues
Partial exemption ― related issuesThis guidance examines a number of important issues related to partial exemption.For an overview of partial exemption more broadly, see the Partial exemption ― overview guidance note.For in-depth commentary on the legislation and case law, see De Voil Indirect Tax Service V3.460.Claiming late input VAT under partial exemptionIf a partially exempt business fails to recover input tax that it is entitled to in the correct VAT return period, then it can normally make a ‘belated’ claim for the input tax. There are time limits (or ‘capping rules’) on making this sort of claim and input tax cannot be claimed more than four years after the due date for the VAT return it should have been included on. If the annual adjustment is not capped under the capping provisions, but earlier periods covered by the annual adjustment are affected, the business can use the annual adjustment to recalculate the amount of recoverable VAT for the longer period. However, if a business has made an error in an earlier period, it cannot use the annual adjustment to correct that error. The business must use the corrected figures when undertaking the annual adjustments; however, the VAT amount must not be adjusted. Please see the Annual adjustments (longer period adjustments) guidance note for more information. Belated claims (whether made via an error notification or any other means) must be based on the partial exemption method in place at the time the input tax was incurred. When making such a
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