Consideration of Partial Exemption special methods: unsatisfactory methods: background
A partly exempt business must use a ‘method’ to determine the amount of input tax it can recover that relates to its taxable supplies (and certain other supplies that carry the ‘right to deduct’). It has two options
- The standard method - a relatively simple calculation prescribed by law.
- A special method (PESM) - a bespoke method proposed by the business and approved by HMRC. Before April 2005 it was possible for a PESM to have ‘de facto’ approval. See PE44500 - Consideration of PE methods: De facto approval - for more information on de facto approval including the criteria to be met for de facto approval.
- From 1 April 2005 any new PESM must be formally approved in writing.
Any method must be ‘fair and reasonable’. This means it must
- produce a fair recovery of input tax, and
- be reasonable both for the business to operate and for HMRC to check.