Category Archives: VAT Claim

VAT: Tribunal costs

By   23 April 2025
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    Latest from the courts

    In the First Tier Tribunal (FTT) case of Eurolaser IT Ltd regarding Kittel and Mecsek assessments and penalties:

    • whether an agent knew or should have known of fraud in supply chain – yes
    • whether such knowledge/means of knowledge to be attributed to Appellant – yes
    • whether Mecsek requires HMRC to show reasonable steps not taken by Appellant – yes
    • whether reasonable steps taken – no
    • unsurprisingly, the appeal was refused

    one interesting aspect was the award of costs.

    Generally, in FTT cases the rule is that each party will usually bear its own costs.

    However, it is worth recapping how the award of costs works via The Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. In this instant case, the Appellant had not ‘opted out’ of the costs protection regime set out in rule 10(c)(ii) of the Rules. Consequently, the FTT ordered that Eurolaser must pay HMRC’s costs – a sting in the tail. So, what are the rules? (Where relevant here)

    Orders for costs

    “10.—(1) The Tribunal may only make an order in respect of costs (or, in Scotland, expenses)—

    (a) under section 29(4) of the 2007 Act (wasted costs) [and costs incurred in applying for such costs];

    (b) if the Tribunal considers that a party or their representative has acted unreasonably in bringing, defending or conducting the proceedings; 

    (c) if—

    (i) the proceedings have been allocated as a Complex case under rule 23 (allocation of cases to categories); and

    (ii) the taxpayer (or, where more than one party is a taxpayer, one of them) has not sent or delivered a written request to the Tribunal, within 28 days of receiving notice that the case had been allocated as a Complex case, that the proceedings be excluded from potential liability for costs or expenses under this sub-paragraph”

    So, in “Complex” cases, an Appellant must submit a request that the case is excluded from the potential liability of costs being awarded, and HMRC must request repayment of its costs incurred in defending the case.

    What are Complex cases?

    These are complicated cases which:

    • require lengthy or complex evidence
    • require a lengthy hearing
    • involve complex or important principles or issues
    • involve large amounts or tax or penalties

    such cases are allocated to a ‘track’ within the FTT system.

    Other cost awards

    It is also worth remembering that costs can be awarded if the appeal is brought unreasonably. This usually means that it is vexatious or frivolous, so proper advice should be sought when considering an appeal.

    VAT Success Stories

    By   22 April 2025
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    I often write about how it is important to seek VAT advice at the right time, see triggerpoints. So, I thought that I’d give some practical examples on where we have saved our clients money, time and aggravation.

    Investment company

    HMRC denied claims for input tax incurred on costs relating to the potential acquisition of an overseas business and threatened to deregister the plc as it was not, currently, making taxable supplies. Additionally, HMRC contended that even if VAT registration was appropriate, the input tax incurred did not relate to taxable supplies and was therefore blocked.

    We were able to persuade HMRC that our client had a right to be VAT registered because it intended to make taxable supplies (supplies with a place of supply outside the UK which would have been taxable if made in the UK) and that the input tax was recoverable as it related to these intended taxable supplies (management charges to the acquired business). This is a hot topic at the moment, but we were able to eventually demonstrate, with considerable and detailed evidence that there was a true intention.

    This meant that UK VAT registration was correct and input tax running into hundreds of thousands of pounds incurred in the UK was repaid to our client.

    Restaurant

    We identified and submitted a claim for a West End restaurant for nearly £300,000 overpaid output tax. We finally agreed the repayment with HMRC after dealing with issues such as the quantum of the claim and unjust enrichment.

    Developer

    Our property developing client specialises in very high-end residential projects in exclusive parts of London. They built a dwelling using an existing façade and part of a side elevation. We contended that it was a new build (zero rated sale and no VAT on construction costs and full input tax recovery on other costs). HMRC took the view that it was work on an existing dwelling so that 5% applied and input tax was not recoverable. After site visits, detailed plans, current and historical photograph evidence HMRC accepted the holy grail of new build. The overall cost of the project was tens of millions.

    Charity

    A charity client was supplying services to the NHS. The issue was whether they were standard rated supplies of staff or exempt medical services. We argued successfully that, despite previous rulings, the supplies were exempt, which benefited all parties. Our client was able to deregister from VAT, but not only that, we persuaded HMRC that input tax previously claimed could be kept. This was a rather pleasant surprise outcome.  We also avoided any penalties and interest so that VAT did not represent a cost to the charity in any way.  If the VAT was required to be repaid to HMRC it is likely that the charity would have been wound up.

    Shoot

    A group of friends met to shoot game as a hobby. They made financial contributions to the syndicate in order to take part. HMRC considered that this was a business activity and threatened to go back over 40 years and assess for output tax on the syndicate’s takings which amounted to many hundreds of thousands of pounds and would have meant the shoot could not continue. We appealed the decision to retrospectively register the syndicate.

    After a four-year battle HMRC settled on the steps of the Tribunal. We were able to demonstrate that the syndicate was run on a cost sharing basis and is not “an activity likely to be carried out by a private undertaking on a market, organised within a professional framework and generally performed in the interest of generating a profit.” – A happy client.

    Chemist

    We assisted a chemist client who, for unfortunate reasons, had not been able to submit proper VAT returns for a number of years.  We were able to reconstruct the VAT records which showed a repayment of circa £500,000 of VAT was due.  We successfully negotiated with HMRC and assisted with the inspection which was generated by the claim.

    The message? Never accept a HMRC decision, and seek good advice!

    VAT: Insolvency update

    By   18 March 2025
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    HMRC has updated its Insolvency Practitioner Bulletin.
    It sets out changes that have been made to form VAT 7 to help insolvency practitioners provide important information and provides explanations of questions on the form.

    HMRC has changed the way it issues VAT repayments to insolvency practitioners from Monday 10 March 2025.

    An update of the VAT 7 form includes a section to input bank details. It is important to ensure that the most recent version of the VAT 7 is used. This may be found at section 6.2 on Insolvency VAT Notice 700/56.

    VAT Returns: A box-by-box guide

    By   10 March 2025
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    VAT Basics

    Return boxes explained – what goes where? A general overview.

     

    Box 1 VAT due in the period on sales and other outputs

    The amount of VAT due on all goods and services supplied in the period covered by the return. This is output tax. The value of output tax may be affected by VAT:

    • on credit notes issued
    • when refunds are made
    • on goods taken in part-exchange
    • underdeclared or overdeclared on previous returns within certain de minimis

    VAT may also be due on supplies outside the mainstream of a business, eg:

    • fuel used for private motoring where VAT is accounted for using a scale charge
    • the sale of stocks and assets
    • goods taken out of the business for private use
    • VAT due under a reverse charge
    • supplies to staff
    • gifts of goods that cost more than £50
    • certain distance sales to Northern
    • commission received for selling something on behalf of a third-party
    • VAT shown on self-billed invoices issued by your customer
    • VAT due on imports accounted for through postponed VAT accounting

    Box 2 VAT due in the period on acquisitions of goods made in Northern Ireland from the EU 

    Since 1 January 2021, a business is only allowed to make acquisitions on goods brought into Northern Ireland from the EU. For acquisitions, the VAT due on all goods and related costs bought from VAT-registered suppliers in the EU should be included.

    Box 3 total VAT due

    Show the total VAT due, the total of boxes 1 and 2. This is the total output VAT for the period.

    Box 4 VAT reclaimed in the period on purchases and other inputs

    Show the total amount of deductible VAT charged on business purchases. This is input tax for the period.

    This will include:

    • VAT paid on imports
    • imports accounted for through postponed VAT accounting.
    • claims for bad debt relief (BDR)
    • payments on removals from a warehousing regime or a free zone
    • VAT shown on self-billed invoices issued by you
    • acquisitions of goods into Northern Ireland from the EU

    Certain VAT paid by a business should not be included in box 4, some examples here.

    Adjustments to the amount claimed may be required for

    • VAT on any credit notes received
    • certain VAT underdeclared or overdeclared on earlier returns
    • partial exemption

    Box 5 net VAT to pay or reclaim

    Deduct the smaller from the larger of values in boxes 3 and 4 and enter the difference in box 5.

    If the figure in box 3 is more than the figure in box 4, the difference is the amount payable to HMRC. If the figure in box 3 is less than the figure in box 4, HMRC will repay this.

    Box 6 total value of sales and all other outputs excluding any VAT

    Show the total VAT exclusive value of all business sales and other specific outputs. These will include:

    • zero-rated, reduced rate and exempt supplies
    • fuel scale charges
    • exports
    • distance sales to Northern Ireland which are above the distance selling threshold or, if below the threshold the overseas supplier opts to register for VAT in the UK
    • reverse charge transactions
    • supplies which are outside the scope of UK VAT (this is debateable, but HMRC require this information)
    • deposits that an invoice has been issued for
    • net value of the road fuel scale charge

    Box 7 total value of purchases and all other inputs excluding any VAT

    Show the total net value of expenditure. This will include:

    • imports
    • acquisitions of goods brought into Northern Ireland from the EU
    • reverse charge transactions
    • capital assets

    Boxes 8 and 9 only need to be completed goods cross the Northern Ireland border.

    Box 8 value of supplies of goods to the EU

    For supplies of goods and related costs, excluding any VAT, from Northern Ireland the EU made from 1 January 2021.

    Box 9 value of acquisitions of goods from the EU

    For acquisitions of goods and related costs, excluding any VAT, from the EU into Northern Ireland from 1 January 2021.

     

    NB: If a business uses one of the following schemes there may be different rules for completing some of the boxes on returns.

    • flat rate scheme
    • cash accounting
    • annual accounting
    • margin schemes for second hand goods, works of art, antiques and collectors’ items
    • payments on account.

    VAT: Input tax claims – alternative evidence

    By   12 February 2025
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    What can be used to make a claim?

    It is well known that in order to claim input tax on expenditure a business is required to have a valid tax invoice to support it. But what if there is no VAT invoice? Can HMRC accept any other evidence to support a claim? Well, the answer is yes… sometimes.

    HMRC has discretion provided by legislation: VAT Regulations 1995/2518 Reg 29(2). Specifically, the wording most relevant here is “…such other documentary evidence of the charge to VAT as the Commissioners may direct.” Broadly, a business must hold the correct evidence before being able to exercise the right to deduct.

    Where claims to deduct VAT are not supported by a valid VAT invoice HMRC staff are required to consider whether there is satisfactory alternative evidence of the taxable supply available to support deduction. HMRC staff should not simply refuse a claim without giving reasonable consideration to such evidence. HMRC has a duty to ensure that taxpayers pay no more tax than is properly due. However, this obligation is balanced against a duty to protect the public revenue.

    Full details of tax invoices here.

    What HMRC consider

    HMRC staff are required to work through the following checklist:

    • Does the business have alternative documentary evidence other than an invoice (for example a supplier statement)?
    • Does the business have evidence of receipt of a taxable supply on which VAT has been charged?
    • Does the business have evidence of payment?
    • Does the business have evidence of how the goods/services have been consumed or evidence regarding their onward supply?
    • How did the business know the supplier existed?
    • How was the business relationship with the supplier established? For example: How was contact made?
    • Does the business know where the supplier operates from (have staff visited?)
    • How did the business contact them?
    • How does the business know the supplier can supply the goods or services?
    • If goods, how does the business know they are not stolen?
    • How does the business return faulty supplies?

    Outcome

    If the responses to the above tests are credible, HMRC staff should exercise their discretion to allow the taxpayer to deduct the input tax. Overall, HMRC is required to be satisfied that sufficient evidence is held by the business which demonstrates that VAT has been paid on a taxable supply of goods or services received by that business and which were used by that business for its taxable activities

    Challenge HMRC’s decision

    A business may only challenge HMRC’s decision not to allow a claim (did not exercise its discretion) if it acted in an unfair or unreasonable way. In these cases, the onus is on the taxpayer to demonstrate that HMRC have been unreasonable in not using the available discretion. This is quite often a difficult thing to do.

    Case law

    Not surprisingly, there is significant case law on this subject. The most relevant and recent being the Upper Tribunal (UT) cases of James Boyce Scandico Ltdv and Wasteaway Shropshire Limited.

    Tips

    If possible, always obtain a proper tax invoice from a supplier, and don’t lose it! The level of evidence required when no invoice is held usually depends on the value of the claim. There would be a difference between persuading an inspector that £20 input tax on stationery is recoverable and the claiming of £200,000 VAT on a property purchase is permissible. As always in VAT, if you get it wrong and claim VAT without the appropriate evidence there is likely to be a penalty to pay.

    If you, or your clients are in dispute with HMRC on input tax claims, please contact us.

    What is outside the scope of VAT, and what does it mean?

    By   10 January 2025
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    Put simply, income which is outside the scope (OSC) of VAT is UK VAT free. It means that either there has been no supply in respect of that income (non-business, or ‘NB’), or if there is, it has a place of supply (POS) which is outside the UK. Although VAT free, OSC is distinct from exempt or zero-rated supplies and has a different impact for the entity involved in NB activities.

    So, here I consider the different types of OSC income and how it affects the VAT position of the recipient of such a payment.

    Charity

    Charities and NFP organisations often receive income from various sources and often receive NB income which is OSC. This income is often donations for which the donor does not receive anything (there is no consideration provided by the charity). An organisation such as a charity that is run on a non-profit-making basis may still be regarded as carrying on a business activity for VAT purposes. This is unaffected by the fact that the activity is performed for the benefit of the community. It is therefore important for a charity to determine whether particular transactions are business or NB activities. This applies both when considering registration (if there is only NB activity a charity cannot be registered and therefore cannot recover any input tax) and after registration. ‘Business’ has a wide meaning for VAT purposes – an activity may still be business if the amount charged does no more than cover the cost to the charity of making the supply or where the charge made is less than cost. If the charity makes no charge at all the activity is unlikely to be considered business. A common area of complexity for charities when considering whether their activities are in the course of business is receipt of grant funding (please see below).

    Grants 

    There is no ‘standard’ VAT treatment of grants. The VAT outcome depends on the precise facts of each specific agreement. The most important test is whether the grantor receives any consideration in return for the payment. It may be that the donor recognises the good work a body does and wishes to contribute (akin to a donation) which is OSC. Alternatively, the recipient of the grant may be obliged to provide something in return (a supply which is not OSC). A helpful way of looking at this is to consider, not what the recipient does with grant money, but what it does for it.

    Inter-company charges

    Charges between VAT group members are OSC. Moreover, charges between non-VAT-grouped companies may also be OSC. These are commonly called ‘management charges’ and the VAT treatment depends on a number of facts. It is often the case that a management charge is used as a mechanism for transferring “value” from one company to another. If it is done in an arbitrary manner with no written agreement in place, and nothing identifiable is provided the income is likely to be OSC. Otherwise, it is likely to be a taxable supply. What is important is not how a management charge is calculated, but what the supply actually is (if it is one). The calculation, whether based on a simple pro-rata amount between separate subsidiaries, or via a complex mechanism set out in a written agreement has no impact on the VAT treatment. As always in VAT, the basic question is: what is actually provided? 

    Place of supply not the UK

    If the POS is outside the UK, then the resulting payment for that supply is OSC. The POS rules can be complex and care must be taken in identifying the correct country to declare output tax (this may include the use of the OSS). In some instances, the Reverse Charge is applied. Input tax incurred in relation these supplies is recoverable, subject to the normal rules, and this distinguishes this type of supply from some of the others discussed here.

    Transfer Of a Going Concern (TOGC) 

    A TOGC is deemed to be neither a supply of goods nor services, so consequently, it is OSC. Input tax incurred in respect of the costs of making a TOGC are considered an overhead of the business for partial exemption purposes, so it is not automatically disallowed because it relates to a ‘non-supply’.

    Supplies by a non-taxable person

    Sales by a business person who is not liable to be VAT registered.

    Insurance etc

    A payment between persons, which is paid under a contract of indemnity, is OSC, because it does not represent consideration for a supply, eg; sums paid under an insurance policy.

    Private transactions

    These transactions between individuals or gifts received are OSC.

    Statutory fees

    These are OSC, an example of such fees are: the London congestion charge, MOT testing, some road tolls, and parking fines.

    Input tax recovery 

    VAT incurred on costs directly relating to OSC activities is not input tax and cannot be recovered (there are no de minimis limits). This is separate to partial exemption and a business/NB calculation is required before a partial exemption calculation is carried out, so it is a two-tier exercise. It may be possible to combine these two calculations, but that is an article for another day.

    HMRC has issued new guidance on the amount of input tax claimable when an element is attributable to NB activities. If an entity is involved in both business and NB activities, eg; a charity which provides free advice and also has a shop which sells donated goods, it is unable to recover all of the VAT it incurs.  VAT attributable to NB activities is not input tax and cannot be reclaimed.  Therefore, it is necessary to calculate the quantum of VAT attributable to business and NB activities. That VAT which cannot be directly attributed is called overhead VAT and must be apportioned between business and NB activities.  There are many varied ways of doing this as the VAT legislation does not specify any particular method.  It is important to consider all of the available alternatives. Examples of these are; income, expenditure, time, floorspace, transaction count etc (similar to those methods available for partial exemption calculations). Any calculation must be fair and reasonable.

    Overall

    OSC income should not be recognised in the value box of VAT returns and it does not count towards the VAT registration limit. It is likely to negatively affect the recipient’s input tax recovery position. The distinction between business and non-business is crucial and will significantly impact on an entity’s overall VAT position.

    Further reading

    The following articles consider case law and other relevant business/NB issues:

    Wakefield College

    Longbridge

    Babylon Farm

    A Shoot

    Y4 Express

    Lajvér Meliorációs Nonprofit Kft. and Lajvér Csapadékvízrendezési Nonprofit Kft

    Healthwatch Hampshire CIC 

    Pertempts Limited

    Northumbria Healthcare

    VAT: Property – The Option To Tax Guide

    By   8 January 2025
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    VAT Bsics

    Opting To Tax commercial property

    Opting to tax provides a unique situation in the VAT world. It is the only example of where a supplier can choose to add VAT to a supply….. or not.

    What is an option to tax (OTT)?

    The sale or letting of a property is, in most cases, exempt (VAT free) by default. However, it is possible to apply the OTT to commercial property. This has the result of turning an exempt supply into a taxable supply at the standard rate. It should be noted that an OTT made in respect of a residential property is disregarded and consequently, the supply of residential properties is always exempt (unless it is the first time sale of a new build – in which case it is zero-rated).

    Why opt?

    Why would a supplier then deliberately choose to add VAT on a supply?

    The only purpose of OTT is to enable the optor to recover or avoid input tax incurred in relation to the relevant land or property. The OTT is a decision solely for the property owner or landlord and the purchaser or tenant is not able to affect the OTT unless specific clauses are included in the lease or purchase contracts. Care should be taken to ensure that existing contracts permit the OTT to be taken.  Despite a lot of misleading commentary and confusion, it is worth bearing in mind that the recovery or avoidance of input tax is the sole reason to OTT.

    Once made the OTT is usually irrevocable for a 20-year period (although there are circumstances where it may be revisited within six months of it being taken – see below). There are specific rules for circumstances where the optor has previously made exempt supplies of the relevant land or property. In these cases, HMRC’s permission must usually be obtained before the option can be made.

    What to consider

    The important questions to be asked before a property transaction are:

    • Was VAT incurred on the purchase price?
    • Is the purchase with the benefit of an existing lease (will the tenant remain?) if so, it may be possible to treat the transaction as a VAT free TOGC (see below)
    • Is the property subject to the Capital Goods Scheme (CGS here)?
    • Is it intended to spend significant amounts on the property, eg; refurbishment?
    • What other costs will be incurred in respect of the property?
    • If renting the property out – will the lease granted be full tenant repairing?
    • Will the tenant or purchaser be in a position to recover any or all VAT charged on the rent/sale?

    These are the basic questions to be addressed; further factors may need to be considered depending on the facts of a transaction.

    Input tax recovery

    Input tax relating to an exempt supply is usually irrecoverable. In fact, a business only making exempt supplies is unable to register for VAT. A guide to partial exemption here. So input tax incurred on, say; purchase, refurbishment, legal costs etc would be lost if a property was sold or rented on an exempt basis. In order to recover this tax, it must relate to a taxable supply. If an OTT is taken, the sale or rent of the property will be standard rated which represents a taxable supply. VAT on supply = input tax claim.

    Two-part process

    The OTT is a two-part process.

    • The first part is a decision of the business to take the OTT and it is prudent to minute this in Board meeting minutes or similar. Once the decision to OTT is taken VAT may be added to a sale price or rent and a valid tax invoice must be raised.
    • The second part is to formally notify HMRC. If the OTT is straightforward the form on which this is done is a VAT1614A. Here. In some cases, it is necessary to obtain HMRC’s permission in which case separate forms are required. HMRC guidance here – para 5.

    There can be problems in cases where the OTT is taken, but not formally notified.

    Timing

    It is vital to ensure that an OTT is made at the correct time. Even one day late may affect the VAT treatment. Generally speaking, the OTT must be made before any use of the property, eg; sale or rent. Care should also be taken with deposits which can trigger a tax point before completion.

    Disadvantages

    As mentioned above (and bears repeating) the benefit of taking the OTT is the ability to recover input tax which would otherwise fall to be irrecoverable. However, there are a number of potential disadvantages.

    • opting a commercial property may reduce its marketability. It is likely that entities which are unable to recover VAT would be less inclined to purchase or lease an opted property. These entities may be; partly exempt business, those not VAT registered, or charities/NFP organisations.
    • the payment of VAT by the purchaser may necessitate obtaining additional funding. This may create problems, especially if a VAT charge was not anticipated. Even though, via opting, the VAT charge is usually recoverable, it still has to be paid for up-front.
    • an OTT will increase the amount of SDLT payable when a property is sold. This is always an absolute cost.

    Transfer of a Going Concern (TOGC)

    I always say that advice should be taken in all property transactions and always in cases of a TOGC or a possible TOGC. This is doubly important where an opted building is being sold, because TOGC treatment only applies to a sale of property when specific tests are met. A TOGC is VAT free but any input tax incurred is recoverable, so this is usually a benefit for all parties.

    Revoking an Option To Tax

    • The cooling off period – If an OTT has been made and the opter changes his/her mind within six months it can be revoked. This is as long as no tax has become chargeable on a supply of the land, that no TOGC has occurred, and the OTT has actually been notified to HMRC. There are additional considerations in certain cases, so these always need to be checked.
    • No interest has been held for more than six years – An OTT is revoked where the opter has not held an interest in the opted building for a continuous period of six years. The revocation is automatic, and no notification is required.
    • 20 years – It is possible to revoke an OTT which was made more than 20 years ago. Certain conditions must be met, and advice should be taken on how such a revocation affects future input tax recovery.

    Summary

    Property transactions are high value and often complex. The cost of getting VAT wrong or overlooking it can be very swingeing indeed. I have also seen deals being aborted over VAT issues. Of course, if you get it wrong there are penalties to pay too. For these reasons, please seek VAT advice at an early stage of negotiations.

    More on our land and property services here

    New HMRC publications: VAT on cladding remediation work

    By   6 January 2025
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    In the aftermath of the horrific Grenfell fire, a lot of buildings require unsafe cladding to be replaced.

    A new Brief clarifies HMRC’s policy on the deduction of VAT incurred on cladding remediation works which are carried out on existing residential buildings. It sets out:

    • the reason VAT costs are incurred when carrying out remediation works to residential buildings with fire and safety defects
    • the circumstances in which the VAT incurred in providing remediation works can be recovered

    Broadly, the distinction is whether the work qualifies as snagging. If it does, the VAT treatment follows the liability of the original building work – zero rated if the original construction was of a zero-rated new residential building, ie; they are supplied in the course of construction of a qualifying building.

    If not snagging, the remedial work will be standard rated.

    If the work is standard rated, it may be recoverable by the recipient in certain circumstances.

    Snagging

    HMRC’s definition of snagging is “the carrying out of remedial works to correct faulty workmanship or replace faulty materials”.  Normally, it is carried out by the original developer under the terms of the original contract. This means it is not seen as a separate supply of construction services. Snagging covers faults that are:

    • found soon after the building is completed
    • still covered by the building contract

    More details on snagging here.

    Furthermore, HMRC has published Guidelines for Compliance GfC11. This guidance covers HMRC’s existing policy on the VAT treatment of remedial works and includes:

    • the definition of snagging
    • an explanation of when you can recover input tax
    • examples to help you work out the VAT treatment of remedial works
    • examples of documents and evidence you should keep
    • information about correcting a submitted return

    HMRC state that its policy has not changed.

    How to apply for a VAT Partial Exemption Special Method

    By   6 January 2025
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    Partial Exemption

    Businesses which makes exempt supplies may be partially exempt (depending on the de minimis limits). A partially exempt business will be prohibited from claiming all of its input tax. A calculation is required to determine the amount of a claim which is blocked. The majority of businesses use what is known as “the standard method” with an annual adjustment.

    Partial Exemption Special Method (PESM)

    However, use of the standard method is not mandatory and a business can use a “special method” (a Partial Exemption Special Method, or PESM) that suits a business’ activities better. Any PESM has to be “fair and reasonable” and it has to be agreed with HMRC in advance. When using a PESM no rounding of the percentage is permitted and it has to be applied to two decimal places.

    HMRC says fair and reasonable means it must be:

    • robust, in that it can cope with reasonably foreseeable changes in business
    • unambiguous, in that it can deal, definitively with all input tax likely to be incurred
    • operable, in that the business can apply it without undue difficulty
    • auditable, in that HMRC can check it without undue difficulty
    • fair, in that it reflects the economic use of costs in making taxable and exempt supplies

    Types of PESMs

    The following are examples of special methods:

    • sectors and sub-sectors
    • multi pot
    • time spent
    • headcount
    • values
    • number of transactions
    • floor space
    • cost accounting system
    • pro-rata
    • combinations of the above methods

    How to apply

    You will need to provide documents with your application. These include:

    More information on the documentation a business needs provide is set out in Appendix 2 of PN706  

    Apply online

    You will need to either:

    • sign in with your Government Gateway user ID and password (if you do not have a user ID, you can create one when you first try to sign in)
    • use your email address to get a confirmation code that you can use to sign in

    This is done here

    A glossary of partial exemption terms may be found here.

    VAT on private school fees – new webinar

    By   16 December 2024
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    HMRC have released a recorded webinar about VAT on private school fees — what you need to do, and when and how to register.

    It covers:

    • if you should register for VAT as an education provider
    • when you should register for VAT
    • how to register for VAT
    • what you need to charge VAT on
    • how and what to reclaim VAT on