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HMRC internal manual

VAT Partial Exemption Guidance

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HM Revenue & Customs
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Partial Exemption methods: simplifcations to the standard method: the scope of the standard method

 
 
 
 
 
 
 

What does the Standard Method cover?

Changes to the scope of the Standard method were introduced from 1 April 2009. In particular they affected businesses that made:

  • supplies of services to customers outside the UK
  • certain financial supplies such as shares and bonds
  • supplies made from establishments located outside the UK

The old rules are described below.

The current rules

The standard method deals with input tax on all supplies unless it is dealt with separately under regulation 103A (Investment Gold).,

Supplies described in items 1 and 6 of Group 5 of Schedule 9 to the VATA 1994 (mainly supplies of financial instruments such as shares and bonds) and supplies made from overseas establishments are catered for by the standard method but are excluded from the values-based calculation, irrespective of their place of supply. Instead, input tax relating to these supplies is ring-fenced and recovered on the basis of use.

All remaining input tax is recovered by reference to the values-based calculation (unless a new partly exempt business opts to recover on the basis of use as described in PE31300.

Example 1: A business provides consultancy services to customers within the UK and outside the UK. Under the current rules the business is required to calculate a recoverable amount of input tax relating to its services to customers outside the UK by way of a separate regulation 103 calculation or alternatively seek approval of a special method. The new rules simplify this by requiring residual input tax to be recovered by reference to the values-based calculation which includes the consultancy services irrespective of their place of supply.

Example 2: A business makes supplies of insurance, shares and bonds to customers located inside and outside the EU. Under the current rules, the business would be required to calculate input tax recoverable as attributable to these supplies to customers located outside the EU by way of a separate regulation 103 calculation. The new rules simplify this so that while input tax relating to shares and bonds, irrespective of their place of supply, must be recovered on the basis of use (for example on a transactions count basis), input tax relating to insurance can be recovered by reference to the values-based calculation which includes the supplies of insurance irrespective of their place of supply.

Example 3: A business makes supplies of management services from an establishment located within the UK and outside the UK. Under the current rules the business would be required to recover input tax relating to its supplies to customers outside the UK using a regulation 103 calculation. The remaining input tax would be recovered using the values-based calculation including supplies made to customers in the UK from the establishment located outside the UK, which could be distortive. To reduce this risk of distortion, the new rules require input tax relating to supplies made from establishments located outside the UK to be recovered on the basis of use. The remaining input tax is recovered using the values-based calculation (excluding supplies made from the establishment located outside the UK).

Is input tax that is recovered on the basis of use under the standard method subject to an annual adjustment?

Yes, where a business provisionally recovers input tax on the basis of use in accordance with the standard method, this needs to be finalised by way of an annual adjustment.

What were the old rules?

Under the old rules (before 1 April 2009), the standard method only dealt with the recovery of input tax relating to taxable supplies made in the UK.It did not cover

  • supplies of services to customers outside the UK
  • certain financial supplies such as shares and bonds
  • supplies made from establishments located outside the UK

Businesses that made overseas supplies that carried the right of recovery (foreign and specified supplies) were required to carry out an additional calculation (known as a regulation 103 calculation) to determine the recoverable input tax on these supplies on the basis of use. Alternatively, following changes introduced on 1 April 2007 they could seek approval of a combined special method that catered for these types of supply. The reason that foreign and specified supplies were excluded from the standard method was because they could sometimes distort the values-based calculation.

What happens if my annual adjustment straddles 1 April 2009?

This change only affects VAT returns commencing on or after 1 April 2009. Input tax incurred, and supplies made, prior to this are dealt with under the old rules. Therefore:

  • input tax incurred in VAT periods that end before or which straddle 1 April 2009, and which falls to be attributed under regulation 103, remains undisturbed (a regulation 103 calculation is not subject to an annual adjustment)
  • input tax incurred in VAT periods that end before or which straddle 1 April 2009, is subject to an annual adjustment under the old rules
  • input tax incurred in VAT periods commencing on or after 1 April 2009, and recovered on the basis of use as relating to supplies of financial instruments or supplies from overseas establishments, is subject to an annual adjustment on the basis of use
  • input tax incurred in VAT periods commencing on or after 1 April 2009 is subject to an annual adjustment in accordance with the new rules

Simplifications to the Standard Method

Following responses to a consultation on ideas to simplify the partial exemption rules which confirmed strong support for their implementation the following additional changes were made from 1 April 2009.

PE31100 1) In-year provisional recovery rate
   
PE31200 2) Early annual adjustment
PE31300 3) Use-based option for new partly exempt businesses

These changes are optional and businesses can benefit from them without seeking approval from HM Revenue & Customs (HMRC).