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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: De facto approval

Although approval of a special method must be in writing, this was not a legal requirement until 1 April 2005. Until then approvals could (but should not) have been given verbally. Additionally, approval could be given by actions or words that fell short of approval, but implied it. Such approvals are known as de facto approvals. Although the verbal or de facto approval of methods is now no longer possible, existing methods will continue in effect until replaced.

If it transpires that such a method is not a fair and reasonable one, the business can only have another method approved from a date the business agrees to, or directed from a current or future date. This will often mean that considerable amounts of input tax are over-claimed in the meantime.

Businesses, their advisors and even assurance staff may wish to argue that a method has been given de facto approval. The Tribunal’s decision in the Wellington Private Hospital (VTD 10627) appeal is the main decision in this area.

In April 1987 the Wellington Private Hospital wrote to the Local Office stating that they proposed to use the standard method. In fact the method they intended to use and did use was a special method. Returns were completed on that basis between 5/87 and 5/89 during which time the business was visited twice. On neither occasion did the officers object to the method in use.

From May 1989 to February 1992 the Wellington Private Hospital stopped claiming input tax. In 1992 their advisers submitted a claim covering the period 05/87 - 02/92 using the standard method. HMRC ruled that they could not use the standard method because they had de facto approval to use a special method.

The Tribunal found that the criteria to be met for de facto approval were:

  • the business must have knowingly adopted or sought to adopt a special method; and
  • the Commissioners must have been aware of what the business was doing or seeking to do.

On this basis the Tribunal accepted that de facto approval of the special method had been given in this case and that the Wellington Private Hospital was bound by it, but he ruled that the de facto approval could not have been given until the visiting officer saw the method in use at the first visit following the application.