Partial Exemption – Standard and special methods
Unlike the apportionment for business activities, the apportionment between taxable and exempt supplies is set down in law. The regulations provide a “standard method” but also give HMRC the power to approve “special methods”. See HMRC VAT Manual PE30000 – Partial Exemption methods and Chapters 4 and 6 of HMRC VAT Notice 706: Partial Exemption for further information.
Note that amongst other exclusions, the value of capital items must be excluded from the partial exemption calculation.
The standard method provides for an apportionment based on the value of taxable supplies as a proportion of total supplies. As with the income method for the business apportionment, while this method has the benefit of relative simplicity there is no necessary correlation between the value of supplies and the extent to which goods/ or services are used to make those supplies.
Since 2009 the default position has been that a charity uses the previous year’s recovery percentage as the provisional recovery rate for residual input tax each period. It is possible, if preferred, to continue to calculate separate recovery percentages for each quarterly VAT return based on actual supplies made.
Special methods must be approved in writing by HMRC and an application for a special method must be accompanied by a declaration from the charity that the proposed method provides a fair and reasonable result.
Special methods typically use apportionments based on such factors as the ratio of inputs or input tax attributable to taxable supplies, the numbers of staff engaged in taxable activity as a proportion of the total, the number of taxable transactions as a proportion of the total or the floor-space used for taxable activity as a percentage of the total. In a more complex charity it may be desirable to use different methods of apportionment for different parts of the charity’s activities.
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