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HMRC internal manual

VAT Partial Exemption Guidance

Partial Exemption powers: special method override notice: serving a notice

A Notice can be served by HMRC or by a partly exempt business, so long as the business has a current special method, when the special method in force does not result in a fair and reasonable attribution of input tax to taxable supplies.

N.B. HMRC’s Notices can only be served with the express permission of Partial Exemption policy team.

A Notice must specify:

  1. that it is a special method override notice;
  2. the current or future date from which it takes effect*;
  3. the reasons why the result of the current special method does not fairly and reasonably reflect the use of goods and services in making taxable supplies; and
  4. the effect of the Notice (only Notices served by HMRC).
  • An earlier date will be specified where a Notice is served as a result of an incorrect declaration, see PE43300.

More detail on each of these criteria follows below. See PE51300 - Example of a Special Method Override Notice - for an indication of what would be served. When Partial Exemption policy team approves the serving of a Notice they will agree the precise wording with local operational staff.

  1. A Notice should specify that it is a Special Method Override Notice. HMRC’s Notices should explicitly state that it is served under Regulation 102A of the VAT Regulations 1995 (SI 1995/2518) as amended by the VAT (Amendment) (No 6) Regulations 2003 (SI 2003/3220). For businesses’ Notices any clear and unequivocal form of words is acceptable to identify the Notice.
  2. A Notice served by HMRC should also specify the (current or future) date from which it takes effect. An earlier date will be specified where a Notice is served as a result of an incorrect declaration.
  3. The reasons given need not be as detailed or as thorough as, for example, a proposal to amend a method. However, it should be reasonably clear from the reasons given that the method is likely to be faulty in whole or in part.

Examples of valid reasons why the special method is not fair and reasonable include:

* The inclusion of [named] supplies in a values based pro-rata for [named] sector is distortive because …; 
* Business circumstances have changed so as to render the basis of apportionment inappropriate [explain why]. 
* HMRC’s Notices should state ALL known material concerns and not be selective. By citing the reasons, as precisely as possible, the business is easily able to determine this part of the correction required by the Notice.
  1. HMRC’s Notices should also state the effect of the Notice. This must include the following:
* It must explain what the business must do to comply with the Notice, including: stating the VAT period from which Notice corrections must be made, explaining what to do about the longer period (if the effective date is mid-year);
* It must also explain that whilst HMRC have outlined all areas of known concern to them, the business must still consider the method in its entirety; and
* It must explain that the override will apply until a replacement method is approved or directed, and invite proposals for a replacement method.

The Notice should also include the following wherever it is appropriate:

  • An explanation of what the business should do if it has a ‘joint method’ comprising a special method under regulation 102 and an agreement (under care and management powers) under regulation 103 (attribution of input tax to foreign and specified supplies).
  • State whether or not HMRC are resiling from the regulation 103 agreement and from when: HMRC should resile from the regulation 103 agreement if it links into a part of the partial exemption special method that they have said (in their ‘reasons’) gives an unfair result.
  • It should also explain any other practical issues concerning how the business should comply with the Notice.

Will HMRC give a lead-in time when they serve a Notice?

Normally HMRC’s Notices will give minimal lead in time - service and delivery of the Notice would be just before the date from which HMRC want the override to apply - to minimise forestalling risks. A longer lead-in may be given where HMRC are sure there is little or no risk of forestalling and or the complexities of a business and its VAT accounting make it unreasonable to expect it to comply within a very short space of time.

This does not mean that Notices are likely to be able to be served at short notice as sufficient evidence will need to be gathered and consideration given to other options. Accordingly, Partial Exemption policy team should be notified at an early stage if you feel a notice may be an appropriate option.