Partial Exemption methods: longer period adjustment: what longer period adjustments cannot be used for
If a business discovers that it has made an error in the completion of its returns, it cannot use the annual adjustment to correct this retrospectively. This was confirmed in the tribunal case of Greenpeace Ltd (LON/99/532). Greenpeace incorrectly treated some of its subscription income as outside the scope of VAT and restricted recovery of the related input tax. In 1998 it tried to correct this by amending the longer period adjustments for 1994 and 1995. The claim was refused because the errors could not be corrected using the annual adjustment. The Tribunal agreed that errors should be corrected under the legal provisions that exist in regulations 34 and 35, and that errors must be adjusted in their correct periods rather than as part of the longer period adjustment.
The normal time limits for making and notifying assessments apply to partly exempt businesses. This means that where errors relate to periods that are capped, no adjustment can be made. This is fully explained in VAEC.
However, you may encounter situations where, although some periods within a tax year fall outside time limits for adjustments, later periods in the same year are still in time. In this case you need to:
- carry out the partial exemption calculations the business should have made that is use the correct figures in the method in place at that time. You should assess or allow voluntary disclosures as appropriate for those periods which are not ‘capped’;
- carry out the correct longer period adjustment it should have made including, if applicable, any required re-attribution and de minimis calculations (in doing this you should use the corrected quarterly figures , even where corrections could not be assessed/repaid due to capping); and
- compare the correct longer period adjustment to the correct partial exemption calculations for all the periods within the longer period. Any difference is your assessment - either payable to (or from) HMRC.
This process can lead to adjustments falling due that intuitively feel ‘wrong’. For example, a business has made errors within a tax period that result in an underpayment of £250. However this period is capped. The annual adjustment (which is uncapped) gives an adjustment in their favour of £300. The amounts due are independent of each other and we can not recover the capped £250 by offsetting it against the uncapped £300. The only circumstances where this should not be followed are where:
- this would otherwise leave the business effectively recovering more than all or less than none of their input tax for the longer period; or
- the business contrived the circumstances to their advantage.
The Court of Appeal case of Dunwood Travel Ltd  EWCA Civ 174 does not alter this approach. That case concerned the calculation of Tour Operators Margin Scheme output tax. The Court of Appeal held that the under the TOMS output tax for the tax year is due in the adjustment period. The quarterly declarations were merely a method of paying on account and were left intact.
In contrast, the timing of the PE longer period adjustment has to be determined by reference to the EU law relating to the right to deduct input tax. This states that this right arises immediately the tax is charged, and must be exercised “during the same period”. In UK legislation, regulation 29(1) requires a taxpayer to claim input tax “on a return made by him for the prescribed accounting period in which the VAT became chargeable”. Therefore in contrast to output tax due under the TOMS, for input tax the time limit in regulation 29(1A) runs from this point and not from the later period when the longer period adjustment is made.