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HMRC internal manual

VAT Government and Public Bodies

Section 33 bodies: calculations: occasional breaches of the insignificance test

There will be occasions where the value of exempt input tax incurred by local authorities in a particular year will cause a breach of the 5 per cent or monetary insignificance test. We accept such breaches as still being insignificant and thus can be ignored, provided they are occasional. A breach is occasional if it is exceptional or uncommon and occurs infrequently or sporadically.

Of primary interest is the breach itself rather than its cause. Where local authorities can demonstrate that a breach is occasional by applying the insignificance test as an average over a period of seven years, their exempt input tax may be treated as recoverable for the year in which the breach occurs.

It is not unreasonable to ask local authorities to produce figures for the seven year period to cover four years prior to the year in which the breach occurred (to be consecutive except where interrupted by moratorium years) and forecast figures for the period of two years following the breach.

This does not have to include the period of the moratorium when local authorities were excused from having to carry out their s33 calculations, but it can do if it is helpful to a local authority. The figures produced will, however, need to show that on average over the period the exempt input tax would have been considered insignificant when applying either the 5 per cent limit or the limit of no more than £625 per month on average. Two examples of what this might look like are as follows.

As an example, applying an average of the insignificance test (during 2011-12) the value achieved over seven years might be as follows:

Year Section 33 (percentage) Note
     
2005-06 3.67%  
2006-07 4.44%  
2007-08   Moratorium so ignored
2008-09   Moratorium so ignored
2009-10 3.47%  
2010-11 2.58%  
2011-12 6.10% Breach
2012-13 4.00% Forecast
2013-14 4.00% Forecast

The average percentage for the whole period is 4.04 per cent (rounded to 2 decimal places). The average is achieved by disregarding the moratorium years and substituting 2005-06 and 2006-07. In this example the average figure as insignificant.

Alternatively:

Year Section 33 (value) Note
     
2005-06 £6,045  
2006-07 £6,510  
2007-08   Moratorium so ignored
2008-09   Moratorium so ignored
2009-10 £5,250  
2010-11 £6,435  
2011-12 £15,200 Breach
2012-13 £6,200 Forecast
2013-14 £6,200 Forecast

The average value for the whole period is £7,405.00. This is achieved by disregarding the moratorium years and substituting 2005-06 and 2006-07. In this example the average figure as insignificant.

If a breach is forecast for a future year a local authority will need to provide figures for a period of seven years and should cover both previous years and forecasts for at least one year after the forecast breach is expected to occur.

It is accepted that breaches occurring every other year will be occasional if it is clear that on average any of the insignificance test checks over the whole period are still insignificant. The exception to this would be where it is clear that there is a pattern of breaches over a period, in which event HMRC could not accept them as occasional. But a breach is still occasional even if they occur in successive years provided over a seven year period the insignificance test is met.

HMRC reserve the right to revisit the question of whether a breach is occasional and insignificant if it subsequently turns out that a local authority miscalculated its percentage in any given year. The same applies to a local authority’s claim that its breach is insignificant where there is evidence of manipulating figures, such as costs incurred in one period being allocated to another to distort the result of the calculation.