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HMRC internal manual

VAT Partial Exemption Guidance

Partial Exemption methods: longer period adjustment: special accounting periods and credit notes

In the normal course of events, taxable input tax is determined provisionally each quarter and then re-examined at the year-end. Each quarter is normally represented by a requirement to submit a tax return. However, there may be situations where a first return covers a period of 6 months or longer, usually in the case of a backdated registration. In such circumstances it is necessary to put the business in the situation that he would have been had he registered at the correct time.

For this purpose, the long return is divided up into special accounting periods. Each special accounting period should be the same length as the tax return following the long return (which would normally be 3 months).

Where the long return cannot be divided up exactly into 3-month sections, it is necessary to work backwards from the end of the long return. This will result in the special accounting period, which is less than 3 months, being the first special accounting period commencing at the effective date of registration. The easiest way is to work out the tax years first. Since these are based on the stagger, the period between the end of the most recent tax year and the end of the long return will almost certainly be divisible into prescribed accounting periods of 3 months duration. The ‘odd’ section at the beginning of the long return will be covered by the longer period adjustment for the registration period which will start at the EDR and end on the day before the first tax year.

For example: A business registers on 15 June 1997 with an EDR of 9 July 1990.

He is given a long return covering the period 09/7/90 - 30/9/97. The return following the long return is 3 months from 01/10/97 - 31/12/97. The stagger will produce a tax year from 1 April to 31 March each year.

Return periods Longer periods
09/07/90 09/07/90 - 31/03/91
  01/04/91 - 31/03/92
  01/04/92 - 31/03/93
(long return) 01/04/93 - 31/03/94
  01/04/94 - 31/03/95
  01/04/95 - 31/03/96
  01/04/96 - 31/03/97


03/98 01/04/97 - 31/03/98 (covered partly by the long return)

In this example the Registration period will be split into special accounting periods as follows:

09/07/90 - 30/09/90; 01/10/90 -31/12/90; 01/01/91 - 31/03/91.

Credit notes

Partly exempt businesses that issue or receive credit notes will need to adjust their recoverable input tax by reference to the tax period when the original tax was charged.