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HMRC internal manual

VAT Partial Exemption Guidance

Consideration of Partial Exemption special methods: unsatisfactory methods: what is an unsatisfactory method?

Sometimes HMRC comes across a business using a PESM it considers to be unsatisfactory.

A method may be unsatisfactory for a number of reasons, for example

  • It produces an unfair recovery of input tax.
  • It is conceptually faulty. It may happen to produce a fair amount of recoverable input tax for the time being, but it does so by chance. It is capable of producing an unfair level of recovery in the future.
  • It is ambiguous.
  • It is an unwritten de facto PESM (pre-dating April 2005). 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.
  • The de facto method may achieve a fair result. The business may be acting reasonably at the moment, interpreting the method in the same way as HMRC. However there is no guarantee that this will continue. For example, the business may engage new advisers who interpret the method differently or it may adopt a more aggressive approach to PE.
  • The de facto method may simply be faulty for the above reasons.

It is important that all cases where the use of an unsatisfactory PESM is identified are notified to the local TAPE team. If there is any doubt who to notify, please contact a Regional Partial Exemption Senior Officer (RPESO).