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HMRC internal manual

VAT Government and Public Bodies

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HM Revenue & Customs
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Section 33 bodies: calculations: insignificance test

Section 33(2) of the VAT Act 1994 (see VATGPB4120) allows local authorities to recover VAT attributable to exempt supplies so long as the amount involved is insignificant.

VAT attributable to exempt activities is considered insignificant and therefore fully recoverable, if it is:

  • no more than £625 per month on average, or
  • less than 5% of the total VAT incurred on all purchases in a year

whichever is the greater.

The total VAT incurred includes that attributable to non-business activities. A year for section 33 bodies runs from 1 April to 31 March, even if they utilise special VAT periods. In calculating the VAT attributable to exempt business activities, section 33 bodies must include an appropriate proportion of VAT incurred on general expenditure including overheads. Where the amount of VAT attributed and apportioned to exempt supplies exceeds either of the criteria above, then none of it can be recovered.

A calculation must be carried out at the end of each financial year and any necessary adjustment should be included in the VAT return for the next period. It is recognised that many section 33 bodies cannot complete their calculation in the period immediately following their year-end. Extensions can be agreed locally but should be no later than the September VAT period.

If there is a change in the liability of a supply then the related VAT should be apportioned for that financial year. Calculations for previous years cannot be revisited other than for the correction of specific errors, including adjustment where the proportion of previously estimated exempt use is later found to be incorrect.