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HMRC internal manual

VAT Partial Exemption Guidance

HM Revenue & Customs
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Partial Exemption methods: Regulation 103B

NB This regulation applies to incidental financial supplies made within the UK and EU regardless of whether any supplies that would fall under regulation 103 are involved.

This regulation was introduced in December 2004 and replaced 103(2) and 103(3). It requires input tax incurred on certain specified costs (see below) used partly to make a sale of existing shares (or other incidental financial supply) within the UK or EU and partly to make any other supply (for example a supply of shares made outside the EU or a taxable supply) to be apportioned according to how the costs were used. This prevents the VAT on such costs from being recovered wholly under regulation 101 or a values-based calculation under regulation 102. This apportionment is to be applied regardless of any PE method or arrangement already in place. Again, there is no specific method of apportionment - it just has to be fair and reasonable.

Only costs that are directly related to an exempt incidental financial supply are covered by this rule. These costs include mainly professional services such as lawyers, accountants, advertising agencies and bodies who provide listing and registration services. They are defined in Regulation 103B(4) and listed in VAT Information Sheet No 09/04. General overheads, such as heating, are not included.

Such costs need to be identified and apportioned on the basis of use outside the terms of any method that applies. However, the non-recoverable input tax identified will form part of the calculation for the purposes of applying the usual de-minimis limit on the business as a whole.