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HMRC internal manual

VAT Partial Exemption Guidance

Consideration of Partial Exemption special methods: the declaration: approving special methods

Before evaluating a proposed method, local officers should first ensure that the Declaration has been completed correctly, clearly identifying the proposed method to which it relates and that it is scanned into the appropriate section of Electronic Folder. A proposed method cannot be approved unless a Declaration has been made in relation to it.

HMRC policy is to ensure that all approved methods are set out in the special method letter format which includes standard terms and conditions (this can be found at PE35500 and PE36000). Provided these do not change the actual calculation for determining recoverable input tax, then they do not change the proposed method. Where it is necessary to change the calculations or introduce new sectors these must be agreed with the business and a new Declaration sought before the method is approved.

For example, it is good practice to make it clear in the terms of a method that input tax which is not specifically allocated to a sector is to be attributed on the basis of use in accordance with regulation 102(6). This simply restates the legislation, is a standard term and does not change the calculation so therefore does not require a new Declaration. However, if it is desirable to introduce a separate “use based” sector that caters for input tax that would otherwise be allocated to a different sector, this changes the proposed method and a new Declaration will be required.

Once approved, a covering letter should be sent with the method asking the business to check it accurately reflects the proposal. Suggested wording can be found within this guidance under PE43000 Annex B. The wording makes it clear that unless the business raises concerns within 30 days it will be taken that it is content with the approved method. It is important these documents are scanned into Electronic Folder. It is also suggested that a follow-up telephone call is made to the business to confirm receipt of the approved method and covering letter. If a call is made a ‘secure note’ should be attached to the covering letter in Electronic Folder confirming that this follow-up action has taken place.