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HMRC internal manual

VAT Partial Exemption Guidance

HM Revenue & Customs
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Partial Exemption methods: longer period adjustment: introduction and legal basis


An annual adjustment is a review carried out at the end of the longer period to fix the provisional quarterly attribution of input tax, taking into account any changes in use. The adjustment has two purposes; it allows the business to:

  • reconsider the use of goods and services over the longer period; and
  • re-evaluate his exempt input tax under the de minimis provisions.

The business must revisit the attribution made over the year and determine whether the goods and services have been used in the manner that was considered to be correct at the time that each return was rendered. Thus, for example, if he had claimed tax back in full because he had intended to use certain goods and services to make a taxable supply but after that quarter (but before the years end), he has used them instead to make an exempt supply, or both a taxable and an exempt supply, he should re-attribute the input tax concerned.

In addition the apportionment calculation should be reworked using figures for the whole adjustment period. The method of calculation should be the standard method or whatever special method may have been agreed. The calculation method will be identical to the quarterly calculations unless an agreed special method specifies otherwise. However, once the calculation is performed the business may also need to consider the override if he operates the standard method. PE32500 - The standard method override - refers.

Also exempt input tax must be reconsidered in terms of the de minimis rules, see PE24500 - De minimis. Although on a quarterly basis he may or may not have been entitled to treat certain amounts of exempt input tax as taxable input tax, he must review this treatment in respect of the longer period.

Tax years, registration periods, special accounting periods and longer periods are defined in VAT Regulations 1995, regulation 99. The annual adjustment or longer period adjustment is covered by VAT Regulations 1995, regulation 107(1) & (2).