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HMRC internal manual

VAT Partial Exemption Guidance

Partial Exemption basics: UK law

 
 
 
 
 
 

VATA 94, sections 24 and 25

VATA 94 Section Effect
   
24(1) Defines input tax as VAT incurred, from whatever source, by a person registered or registerable for VAT, for the purposes of their business.

If VAT is incurred wholly or partly for other purposes then it can only be input tax to the extent that it is incurred for business purposes.

This may well involve apportionment of the VAT and many people confuse this process with partial exemption. Partial exemption, however, only deals with input tax so this process must be entirely dealt with before partial exemption can be considered.    
  25(2) Covers deduction by allowing credit for input tax. It refers to s26 to define how much credit is to be allowed.
  25(7) Provides for input tax blocks such as those on cars and business entertainment. Again this process is prior to the consideration of partial exemption.

More on input tax can be found in VIT. 

VATA 94, section 26

VATA 94 Section Effect
   
26 Deals with how much of the input tax incurred by a registered person in any period is allowable for credit. It lists in s26(2) the supplies that carry the right to deduct input tax incurred on their cost components. These are:
  • taxable supplies (whether at standard, lower or zero rate liability);
  • supplies made outside the UK that would have been taxable had they been made in the UK; and
  • any other supply that the treasury has specified by order under this section.     
      26(3) Places an obligation on the Commissioners to make regulations to secure a “fair and reasonable” attribution of input tax to the supplies listed above. We must do this on individual returns and over the longer (normally annual) period.
This is achieved by Part XIV of the VAT Regulations, SI 1995/2518.

The Specified Supplies Order, SI 1999/3121

The Treasury has made an order, as discussed above, to allow recovery of VAT in the UK which is incurred on cost components of the supplies listed in Article 169 of the principal VAT Directive (2006/112/EC) (Formerly Article 17(3) of the Sixth Directive). The supplies that give rise to a right to deduct because of this order are:

  • financial services supplied to persons belonging outside the member states or directly related to an export of goods;
  • insurance services supplied to persons belonging outside the member states or directly related to an export of goods; and
  • supplies of investment gold.

Part XIV of the VAT Regulations, SI 1995/2518

The regulations in this part set out the rules for doing partial exemption in all normal circumstances. They will be fully set out and explained in the rest of this guidance.

Part XV of the VAT Regulations, SI 1995/2518

The regulations in this part deal with what is normally referred to as the Capital Goods Scheme. This provides for input tax, incurred on major items of computer hardware or on substantial land related costs, to be adjusted over a period of years, rather than just on the use and intended use in the first year they are put to use in the business. This is allowed for under Chapter 5 of the principal VAT Directive (2006/112/EC) (Formerly Article 20 of the Sixth Directive). They will be fully set out and explained in the rest of this guidance.