De minimis test – Partial Exemption methods
There are de minimis rules that allow VAT relating to exempt supplies to be recovered provided it amounts to less than £625 per month and is less than 50 per cent of the input tax incurred in the VAT accounting period (the original test). Since April 2010 there have been two simplified tests that can be applied:
- Test One: total input tax incurred is no more than £625 per month on average and the value of exempt supplies is no more than 50 per cent of the value of all supplies
- Test Two: total input tax incurred less input tax directly attributable to taxable supplies is no more than £625 per month on average and the value of exempt supplies is no more than 50 per cent of the value of all supplies
A charity is de minimis if it passes Test One, Test Two or the original test, and if it passes any one test there is no need for it to consider the other two. The charity is still required to review its de minimis status at year-end as before and account for any under- or over-recovery of input tax as part of its adjustment.
The normal rules are that a de minimis test should be carried out in each period. However, charities have the option of applying the de minimis test once a year instead of four or five times a year, where certain conditions are met. It allows a business that was de minimis in its previous partial exemption year to treat itself as de minimis in its current partial exemption year. This means that it can provisionally recover input tax relating to exempt supplies in each VAT period, saving the need for partial exemption calculations. Charities are still required to review their de minimis status at year-end; and if they fail the de minimis test for the year they must repay the input tax relating to exempt supplies that they provisionally recovered in-year. However, there is no need to carry out in-year partial exemption calculations.
The main risk of using the annual test is that if a charity provisionally recovers input tax relating to exempt supplies in-year but then fails the test at year-end it is required to repay this input tax to HMRC. If a charity thinks that it is likely to fail the test at year-end and repaying the input tax would cause it difficulties, then it would not be advisable for it to take up the option of the annual test.
For further information please refer to Chapter 11 (the de minimis rule) of HMRC VAT Notice 706: partial exemption.
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