Partial Exemption principles: De minimis
Legal basis of de minimis
Article 173(2)(e) of the principal VAT Directive (2006/112/EC) (formerly Article 17(5)(e) of the Sixth Directive) permits member states to allow businesses to deduct the element of their input tax that would otherwise not be deductible so long as it is insignificant. It is up to individual member States to define what is insignificant.
What the UK considers to be insignificant levels of exempt input tax for most businesses is set out in regulation 106 and is commonly referred to as the de minimis limit.
VATA 94, s33 (2)(b) has a further insignificance provision that applies to bodies that fall under that section of the Act. How this is to be interpreted is set out in Notice 749 Local authorities and similar bodies and further referred to in PE62250 - Local authorities.
This is given in regulation 106 and confirms that a business may deduct his exempt input tax if he fulfils the following conditions:
- it is not more than £625 per month on average; and
- it is not more than 50% of all input tax incurred.
This is applied after all PE calculations are complete so a method has to be set and full calculations done before a conclusion on de minimis can be reached. The only exception to this would be if, after direct attribution, the total of directly attributable exempt input tax and all residual input tax were within the limit.
De minimis applies both in the provisional period declarations and in the longer period. Full calculations have to be done in the longer period, ignoring any provisional conclusions on de minimis in any of the tax periods, before final conclusions can be drawn. If a business was de minimis in some of the individual tax periods but not in the longer period, or vice versa, then this will be reflected in the longer period adjustment.
Where a business was de minimis in the tax period (or in the normal longer period if there was one) but an override adjustment is due then de minimis has to be re-considered again.
- It is an all or nothing test, not an allowance.
- The “per month” part should be read as “per month or part of month” for businesses who have returns that include parts of months, unless this is solely due to their having agreed non-standard tax periods.
The only tax planning permissible by businesses in this area is in when tax points for supplies received fall. Businesses may not manipulate the limits by omitting part of the exempt input tax they have incurred from their records or by moving when they post purchase invoices from one period to another. Although input tax not posted in previous periods in error can be claimed in later periods under regulation 29, and tax so claimed becomes part of the true amount of tax of a later period, the deductibility of the tax will still refer to the position when the tax was incurred. The finding of such errors may require de-minimis for the individual and longer periods in which the tax was incurred to be re-worked.
Any adjustments that may be due under the CGS are not taken into account when deciding whether a business is de-minimis.
Where a business has a combined Partial Exemption and Busienss / non-business method it may not take advantage of the de-minimis rules. There is no de-minimis for business/non business methods so no VAT identified as relating to non business and exempt supplies may be recovered.
Interaction with PE methods
The de minimis limit does not interact with PE methods; either in calculations or in deciding what method should be used. The method to be used must be agreed based solely on whether it produces a fair and reasonable answer with no account taken of whether the business will then be de minimis or not.
Statements from businesses during the process of negotiating a PE method, to the effect that they consider themselves to be a de minimis organisation and that only a method that achieves this can be acceptable, have no meaning or status. Likewise officers should not resist approving a fair and reasonable method that happens to produce a de minimis result solely because they were not expecting this.