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letter requesting partial exemption special method
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Letter requesting partial exemption special method

Letter requesting partial exemption special method

Could your partially exempt business be paying excessive VAT when you consider how the different activities really contribute to general costs? Use this letter to ask for a unique method of apportionment to achieve a more fair calculation for your business.

General rule

If you make both taxable and exempt supplies, your business is “partially exempt”. When this is the case you can recover all the input tax on costs which are directly attributable to making the taxable supplies, but none of the tax attributable to the exempt supplies. There will then be a residual amount of input tax incurred on general costs which isn’t directly attributable to either type of supply. By default, some of this residue can be recovered by apportioning it by reference to the total taxable and exempt supplies in the period.

Example. Let’s suppose that Acom Ltd makes the following supplies in its most recent VAT quarter:

  • taxable - £1 million (three transactions)
  • exempt - £4 million (seven transactions).

The total input tax incurred is £365,000, attributed as follows:

  • taxable supplies - £100,000
  • exempt supplies - £180,000
  • residual - £85,000.

Using the standard method, the residual tax would be apportioned by reference to turnover, so an additional £85,000 x 1/5 = £17,000 could be recovered.

 

Special method

Sometimes the standard method does not truly reflect the underlying business activity. For Acom in the example above, the taxable turnover represents 20% of overall turnover, but this is achieved from 30% of the total transactions. In these circumstances, you can seek approval to use a special method to apportion the residual tax - and potentially recover more.

Example. From this basic information Acom could propose that the residual tax is apportioned by reference to the number of transactions, or to the ratio of attributable input tax. Let’s compare the result with the standard method.

Method

Calculation

Recoverable

Input tax

£85,000 x 100/365

£23,288

Transactions

£85,000 x 3/10

£25,500

Standard

£85,000 x 1/5

£17,000

 

Requesting the special method

A special method cannot be used without prior approval from HMRC. If you wish to use one, you need to write to your VAT office proposing your method, and explaining why it is a more suitable method than the standard one. VAT Notice 706 sets out what basic information needs to be provided in your letter:

  • a brief explanation of why your current method is no longer suitable or the proposed new method is better
  • details of all the business supplies which you make or intend to make including any foreign and specified supplies and their approximate value
  • the VAT liabilities of your main supplies and their place of supply
  • details of the main costs you incur which bear VAT and the activities to which those costs relate
  • a worked example of your proposed method using actual figures
  • an explanation of how the method would deal with changes in your activities that might arise in the future
  • a copy of your most recent annual accounts; and
  • your Declaration

The Declaration is a very formal element of the proposal - we have used HMRC’s template to include in our letter for your convenience. A request will be rejected if this is not completed correctly.

 

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