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HMRC internal manual

VAT Partial Exemption Guidance

Partial Exemption methods: longer period adjustment: longer periods and annual adjustments

Although we often use the expression annual adjustment, in law there is only a longer period adjustment. In normal circumstances the longer period will be the same as the business’s tax year. However, if the business did not incur any exempt input tax in either the immediately preceding tax year (or if applicable the immediately preceding registration period), the longer period will begin on the first day of the prescribed accounting period in which exempt input tax is first incurred and end on the last day of the tax year.

It follows that where exempt input tax is only incurred in the last prescribed accounting period of the tax year and there was no exempt input tax in the preceding tax year (or registration period), no longer period applies for that tax year. He does not have to make an annual adjustment.

If a business incurs exempt input tax in his registration period he will not have had any preceding tax year. His longer period adjustment runs from the date on which he first incurred the exempt input tax to the last day of his registration period. The date will be set by normal tax point rules irrespective of whether he is cash accounting.

Where a business deregisters during a tax year he will have a deregistration period. The longer period will cover this deregistration period.

It is possible to approve a longer period that does not correspond with a business’s tax year. If, for example a business changes methods during a tax year and it is decided not to back date the new method we can agree to a mid year adjustment. Unless there is evidence that the request for this is intended to minimise the effect of a liability change or to bring forward the application to the business of more favourable de-minimis limits, such requests can be approved locally. Application and approval should always be in writing.

When are adjustments to be carried out?

Businesses are to carry out annual adjustments immediately following the end of each tax year and enter any resulting over or under-deductions in their VAT account for the next prescribed accounting period following the end of the tax year. The annual adjustment has no effect on the partial exemption status in the tax period in which the adjustment is actually rendered.

The Commissioners have powers to allow businesses to account for the adjustment in a later prescribed accounting period and this may be allowed locally where businesses can show that they have genuine difficulty in using the first prescribed accounting period after the end of the tax year. Where use of a later period is allowed, this must be done consistently. Application and approval should be in writing.