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HMRC internal manual

VAT Partial Exemption Guidance

Consideration of Partial Exemption special methods: the declaration: incorrect declarations

A Declaration is incorrect if two conditions are met:

  • The method does not produce a fair and reasonable attribution of input tax to taxable supplies resulting in an over-recovery of input tax by the business; and
  • The person signing the Declaration knew or ought reasonably to have known this at the time they made the Declaration.

If HMRC uncovers evidence to show that a Declaration is incorrect they may serve a Notice to recoup the over-recovered input tax. The Notice and accompanying correspondence would clearly explain why HMRC consider the method unfair and why the signatory knew, or ought reasonably to have known this at the time of the Declaration. Subject to the normal rules of the four-year cap, the Notice will apply from the effective date of the method and continue to apply until a replacement method is approved or directed. While the Notice remained in force, the business would be required to adjust for both over and under-recoveries of input tax in accordance with the principle of use and may be subject to interest and misdeclaration penalties in accordance with the normal rules.

If an officer has concerns that a business has made an incorrect Declaration they should notify their Regional Partial Exemption Senior Officer (RPESO) immediately. The RPESO, in consultation with Partial Exemption Policy Team, will then decide on how best to proceed. No action should be taken under this measure without the explicit authorisation of Policy Team.

A business that uncovers an incorrect Declaration should notify HMRC so it may serve a Notice to override the method. By voluntarily disclosing an incorrect Declaration, the business avoids the possibility of penalties in accordance with the normal rules, although interest may still be due. In circumstances where the business voluntarily discloses an incorrect Declaration and the business and HMRC are able to agree a suitable new method, HMRC may apply a ‘light touch’ and, exceptionally, allow the business to replace the existing method with the new method. This would save HMRC taking action under the measure and the business would not be liable to penalties. A Declaration would, of course, still be required for the new method.

A Notice served under this measure overrides the method from its effective date and not the date at which an over-recovery first arose. Going back to the start date ensures a fair and reasonable result throughout the duration of the method, correcting for both over and under-recoveries of input tax. A Notice served under this measure only applies to accounting periods commencing on or after 1 April 2007.