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HMRC internal manual

VAT Partial Exemption Guidance

Partial Exemption principles: VAT, input tax and Partial Exemption methods

Prior to 1 January 2011 Partial exemption calculations were only concerned with the recovery of input tax. Businesses had to first identify the VAT incurred that could be treated as input tax. VAT incurred on goods or services that are used wholly for non-business purposes it is not input tax. VAT on goods used partly for business and partly for non-business purposes was normally apportioned. Once the Input tax was identified a partial exemption method would be applied.

Since 1 January 2011 the scope of the partial exemption special method regime has been widened. While taxpayers may continue to recover input tax using a business / non- business calculation followed by a separate partial exemption method any taxpayer with non-business activities who makes exempt supplies can no longer formally agree two separate calculations. HMRC will only agree a combined method in these circumstances.

A business may make supplies that although are not taxable supplies, still carry the right to recover the VAT incurred (see PE34000 - Regulation 103: Recovery of input tax attributable to foreign and specified supplies). VAT relating to these supplies may be recovered under a regulation 103 calculation or under a combined method (See PE34500)

Blocked input tax, for example input tax incurred on cars and business entertainment is always non-recoverable.