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HMRC internal manual

VAT Partial Exemption Guidance

Consideration of Partial Exemption special methods: the declaration: acting reasonably

The Declaration is based on the concept of reasonableness. In forming an opinion as to whether the signatory of a Declaration ‘ought reasonably to have known’ the method would result in an unfair over-recovery of input tax, HMRC will consider whether a reasonable person charged with making a Declaration on behalf of the business who had taken reasonable steps would or should have identified this fact at the time they signed the Declaration. HMRC will consider all available facts including any information which relates to the business’s actual and planned use of costs and the steps that were taken by the person who signed the Declaration.

A reasonable person is a competent and conscientious person who has sufficient authority to take reasonable steps to establish whether the proposed method is fair and reasonable before they sign the Declaration.

Reasonable steps might include but are not limited to:

  • Referring to partial exemption published guidance and relevant Revenue and Customs Business Brief articles when formulating a special method.
  • Speaking with senior managers, such as business heads, about planned events that might affect how costs are attributed.
  • Having regard to relevant issues that have arisen during the audit process or as a result of taking advice or assurance.
  • Making enquiries about new income streams or where expenditure patterns have clearly changed since any previous method was approved.
  • Maintaining a list of cost drivers where they are the basis for the special method apportionment.
  • Ensuring that acquisitions and disposals and changes to corporate structure are reflected in the method.
  • Taking account of concerns made previously by HMRC during routine VAT assurance and when discussing partial exemption.
  • Speaking with HMRC if there are doubts as to how partial exemption principles apply in a particular situation and drawing their attention to known risk and issues.

It is important to note that HMRC does not necessarily expect all of these steps to be followed each time a Declaration is signed. What constitute reasonable steps will vary from business to business and is likely to depend on changes in circumstances and plans since the business last satisfied itself that its method was fair and reasonable. This will be a matter of professional judgement for the signatory of the Declaration.

HMRC will not seek evidence of the reasonable steps taken in declaring a method as part of routine VAT enquiries. However, a business may choose to keep evidence and to ask HMRC to take this into account in the event of problems arising.