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HMRC internal manual

VAT Partial Exemption Guidance

Partial Exemption methods: introduction to special methods

Legal basis

A special method is any method other than the standard method (with any appropriate override) that enables a partly exempt business to determine the amount of input tax it can deduct. The relevant law is Regulation 102(1), VAT Regulations 1995 which empowers the Commissioners to approve or direct the use, by a taxable person, of a method other than the standard method. Regulation 102(1A)(b) also allows for the recovery of input tax relating to outside the scope or other specified supplies within a special method (see PE34000). However, a business may still opt for a separate regulation 103 calculation outside of the special method. If it does, then all such input tax must be dealt with under regulation 103.

Partial exemption methods only deal with input tax. They do not deal with VAT incurred for non-business purposes. Accordingly, business/ non-business apportionment agreements have historically been entirely separate from a partial exemption special method and this remains the default position. However, from 1 January 2011 a taxable person may make an apportionment required under s24(5) using a method provided for in reg 102(1). This is known as the combined method. Further information on the combined method can be found in Paragraph 7 in public notice 706.

Guidance on what to do if a business requests a separate business/non-business apportionment agreement can be found in VBNB.

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Aim of a method

The UK’s rules on partial exemption derive from Article 173(2)(c) of the principal VAT Directive (2006/112/EC), which allows ‘use’ to be employed as a basis for the deduction of input tax. The standard method is designed to reflect use in most circumstances, but that will not always be the case.

Any partial exemption method should ensure that the business recovers that input tax that is incurred on goods and services used or to be used in making taxable supplies. The advantage of a special method is that it can be tailored to suit the particular circumstances of the business and therefore more accurately determine the correct amount of input tax that is deductible.