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HMRC internal manual

VAT Partial Exemption Guidance

Consideration of Partial Exemption (PE) special methods: sampling exercises and fixed percentages

Suggestions are often put forward for methods based on sampling exercises where it is argued that the exercise has been costly or that investment has been made in new resources in anticipation of approval thus putting pressure on the officer to approve. Sampling exercises are not appropriate. Sampling is in effect an estimation device. Estimation is not allowed see PE20500. Similarly, fixed percentages should be avoided, because they are virtually impossible to verify and do not react to changing circumstances. Ideally, a method should be agreed that would flow with the business and react to the changing relationship of use between the various inputs.

In particular, you must not state that a sector can recover all (or none) of its residual input tax. If a sector currently makes exclusively taxable or exclusively exempt supplies it should be stated that the residual input tax in the sector should be recovered to the extent that the input tax bearing costs are used, or to be used, to make taxable supplies.