VAT – partial exemption changes

HMRC have announced changes to the basic partial exemption rules, most of which will have a beneficial effect on businesses afflicted by this concept. Affected businesses are those that have exempt income as well as taxable income, and who are obliged to disallow a certain amount of VAT on expenditure. In simple terms, those changes are:

• Instead of doing a quarterly calculation, based on that quarter’s figures, the business can utilise the previous year’s annual average and apply it to this year’s figures. An annual adjustment is then carried out at the year end, and that percentage is used for the next 12 months.
• Presently, when the obligatory annual adjustment is carried out, the resulting VAT adjustment has to be made on the next VAT return of the new year. HMRC are now proposing that the business can make the adjustment in the last VAT return of the previous year instead.
• A potential ‘use – based’ method can be utilised for new businesses, where the normal trading pattern has not yet established itself. Thus the first year, with heavy expenditure, might otherwise fall to have a very low VAT recovery rate.

The above three measures are voluntary and the decision whether or not to adopt them will very much depend on individual circumstances.

The fourth change is compulsory, but as it is specific to the following types of supplies I will not bore everyone else with the detail:

• supplies of services to customers outside the UK
• certain financial supplies such as shares and bonds
• supplies made from establishments located outside the UK

If you consider that you may be affected by any of the above, please ask for further details.

NB: although the changes are effective from 1/4/09, the fine print points out that this means VAT returns commencing on or after 1 April 2009.

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