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HMRC internal manual

VAT Partial Exemption Guidance

Other Partial Exemption issues: local authorities

The statutory activities of local authorities are outside the scope of VAT. This means that they cannot recover VAT incurred in delivering those activities. To address this, section 33 of the VAT Act 1994 allows local authorities to recover:

  • all the input VAT incurred on goods and services purchased in relation to their non-business activities; and
  • an “insignificant amount” of input VAT incurred in relation to their exempt business supplies. This addresses the situation where a local authority is engaged in a mix of non-business activities and exempt business activities, and the two cannot be conveniently distinguished. Examples include the provision of education or certain care services.

Insignificant means that the exempt input tax should be no more than £625 per month on average (the de-minimis limits), or should not exceed 5% of the total input VAT incurred by a local authority, whichever if the greater. In practice most local authorities use the 5% rule. If the partial exemption limit is exceeded, the local authority must repay all the VAT it has recovered in relation to its exempt supplies during the financial year. Further guidance can be found in VATGPB.

Where local authorities set up separate companies to undertake trading activities, such companies are subject to the normal partial exemption rules covered by the rest of this volume of guidance.