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HMRC internal manual

VAT Partial Exemption Guidance

Consideration of Partial Exemption special methods: the declaration: invoking the measure

On the assumption that the vast majority of businesses will act reasonably to ensure their method is fair at the time it is proposed, cases in which the measure is applied will be rare. Also, subject to cases of abuse, HMRC will not apply the measure where a method becomes unfair as a direct result of a new case precedent, or because of a change in legislation or policy. In these situations any action would be prospective only.

A Declaration is not incorrect if it relates to an under-recovery of input tax by a business. This is because a business can already correct this by applying to backdate the approval of a method to the beginning of the tax year (see PE47000 - Backdating approval). It remains important for the business to consider its circumstances at the time of making the Declaration, and if subsequent problems do arise, to speak with HMRC at an early stage.

The measure is not intended to encourage adjustments, up or down, that might be justified with the benefit of hindsight. Provided a business has acted reasonably in proposing a fair and reasonable method, HMRC will not use the measure to correct an over-recovery of input tax. This is to give the business maximum certainty. However, by the same token, a business cannot invoke the measure to correct an under-recovery.

If a business discovers it is under-recovering it can apply for an alternative method to be backdated to the start of the current tax year. If a business is concerned by a possible under-recovery on certain costs in the event of some circumstance arising, then it can often protect its position by applying for a method in which the certain costs are ring-fenced in a sector in which attribution is based on the principle of use.

Finally, if despite having acted reasonably and having proposed a fair and reasonable method, a substantial under-recovery arises because of a wholly unexpected occurrence then HMRC may allow exceptional backdating to the limits of the three-year cap. Examples of events for which exceptional backdating was available include sterling’s ejection from the Exchange Rate Mechanism, Foot and Mouth disease, and the World Trade Centre disaster.