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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: ‘Provisional’ methods

Where businesses are uncertain as to the mix of supplies they will make, they may sometimes request a ‘provisional’ method. However, legally the business must either use the standard method or an alternative method approved or directed by the Commissioners. Accordingly, there is no such thing as a provisional method. Any approved special method is the method approved for the business unless a later method is subsequently approved which operates retrospectively to cover the period in question.

If the method approved does not produce a fair and reasonable recovery of input tax once the mix of supplies is known, then the business or HMRC may serve a special method override notice (SMON) to correct the position.

‘Provisional’ recovery rates in a permanent method

The use of provisional recovery percentages in approved special methods is not precluded. Usually this takes the form of using the previous year’s recovery rate to provisionally attribute the input tax until the actual recovery rate is determined in the annual adjustment. This is acceptable, since there is a mechanism approved in advance to resolve how the provisional recovery rate will be translated into an actual recovery rate.