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HMRC internal manual

VAT Partial Exemption Guidance

Other Partial Exemption issues: group and divisional registration

Group registration

Input tax recovery by VAT groups must be considered in terms of the use by the VAT group as a whole of the goods and services received by each individual member. All intra-group supplies are disregarded. Thus input tax on advice received by company A used to provide advice intra-group to company B is exempt input tax if company B uses the advice it receives to make supplies with no right to deduct. It may be that company A never makes any supplies with no right to deduct itself yet it incurs exempt input tax on behalf of the VAT group.

A VAT group can only have one method for partial exemption. This is frequently misunderstood. Since there is only one taxable person, there can be only one method for that person and the representative member of the VAT group is required to account for deductions made on behalf of itself and other members. Where different offices are responsible for assuring different companies that are members of a VAT group it is essential that the coordinating office ensures that the partial exemption rules are applied throughout the group. This responsibility cannot be delegated since the overview of the whole VAT group is necessary to ensure that the correct recovery of input tax is made.

The de minimis limit must also be applied to the group as a whole but when determining whether financial or real estate transactions are incidental, businesses within the group have to be looked at separately.

Special care needs to be taken in agreeing special methods for VAT groups. PE30000 onwards covers special methods in greater depth. Group membership changes may also alter the use of items covered by the Capital Goods Scheme. [See PE67000 - The Capital Goods Scheme (CGS)]

Divisional registration

Divisional registration allows a single taxable person to register various areas, or divisions of its business as separate VAT registrations. Because there is only one taxable person, the partial exemption rules apply to it as a whole.

Divisional registration is not normally allowed if the taxable person is partly exempt unless its exempt input tax is below the de minimis limit. Remember, the de minimis limit applies to the taxable person as whole - not to each division. This fact is commonly misunderstood.

Where the single taxable person exceeds the de minimis limit then normal partial exemption rules apply and any approved or directed partial exemption method applies to that person as a whole. Detailed guidance on divisional registrations can be found in V1-28 Registration.

It is important to remember that when testing any exempt input tax incurred by the taxable person against the de minimis limit, the taxable person must first apply a partial exemption method to apportion non-attributable input tax. This will apply to all of the divisions - not just those involved in making the supplies with no right to deduct or those who incur exempt input tax.

It is also important to remember that where goods and services are transferred between divisional registrations of the same taxable person, they do not constitute supplies, and are outside the scope of VAT. Accordingly VAT is not charged, nor are tax invoices raised in respect of such transactions. For this reason it is important for the taxable person to identify the purchasing or originating division for any goods or services which are acquired by one division for the use by another division in making exempt supplies. The input tax on those goods or services must be treated as either exempt input tax or residual input tax depending on the use to which they have been put. Care must be taken to ensure that the originating division is aware of this issue, and applies the partial exemption rules correctly to any such input tax.