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HMRC internal manual

VAT Partial Exemption Guidance

HM Revenue & Customs
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Consideration of Partial Exemption (PE) special methods: requests for a special method and information required


Requests for a special method and information required

If a business would like to operate a method other than the standard method, it must seek approval from HMRC under Regulation 102 and provide a declaration that the method is fair and reasonable (see PE24000 - Fair and reasonable). This will usually be done via their Local Office. Although any approval of a special method must be in writing, the law does not require that an application has to be. However it is reasonable to insist that you are provided with full written details of any proposed special method. This will reduce the chance of later disagreement on the terms of the method. You should, therefore, request the businesses to apply in writing and to set out full details of the terms of their proposed method. While the onus is on the business to propose a suitable method and provide sufficient information to substantiate it is fair, HMRC welcomes the opportunity to discuss proposals with businesses and consider how partial exemption principles ought to apply.

Any method that gives a ‘fair and reasonable’ result should be approved and there may be more than one method that will reflect use. Accordingly, HMRC may approve a new method if they are satisfied it is fair and reasonable, even where the current method is also fair.

Information required

When considering whether a special method should be approved, you will need to focus on the supplies made by the business and the extent to which input tax bearing costs are used or to be used in making taxable supplies.

Information likely to be required when considering a proposed method includes:

  • knowledge of the business structure;
  • knowledge of the business’s accounting and, if appropriate, management accounting systems
  • details of the supplies made, or intended supplies, including their place of supply;
  • details of the input tax bearing costs incurred, and how they are used or will be used to make taxable supplies;
  • an understanding of how costs are internally attributed between the various sectors of the business;
  • a worked example of the method using actual figures from the business, or in their absence, using figures from business projections produced for lenders or shareholders (‘Illustrative figures’ chosen by the business should not be accepted);
  • Where appropriate a demonstration that the proposed proxy is more accurate than income.

The worked example will help you to determine whether the method can be readily checked, can be routinely worked by the business and does indeed give a result that reflects the use of the input tax bearing costs.

If further information is required to enable an Officer to properly consider the proposals then it should be requested - preferably in writing. In the absence of all the necessary information being made available to the Commissioners to properly consider the proposed method, it should not be approved.

Elements of a special method

A special method will normally have up to three distinct stages: direct attribution, allocation and apportionment. Direct attribution is the identification of input tax on costs that relate exclusively to taxable or exempt supplies. Allocation is the process of distributing residual input tax that relates to more than one sector between the various sectors and sub-sectors of a sectorised method. A sectorised method is one that allocates residual input tax to different business activities and apportions each allocation separately. Apportionment is the process of dividing residual input tax between taxable and exempt supplies.

Direct attribution should always be a stage in a special method. You will however need to satisfy yourself that the allocation method(s) and the apportionment calculation(s) produce a fair and reasonable result. Detail on when particular apportionment and allocation methods may be appropriate can be found at PE22500 for allocation methods and PE23000 for apportionment methods. Detail on when a sectorised method may be appropriate can be found at PE22000.