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HMRC internal manual

VAT Partial Exemption Guidance

HM Revenue & Customs
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Other Partial Exemption issues: correcting errors

Where a partly exempt business discovers an error and makes the necessary adjustments within three years, they will not be affected by the three-year capping rules. However where a business does not claim input tax to which the business is entitled, or discovers a mistake, and fails to correct it within three years, the input tax is not recoverable.

In addition, where a business fails to claim input tax and the error falls in a period that is more than three years old, the error cannot be corrected in the partial exemption annual adjustment for the year when the tax was originally incurred, even if the adjustment is not capped. However, even though the input tax cannot be reclaimed the unclaimed amount should be included in the annual adjustment calculation.

Although businesses may claim input tax on any VAT return that is on or after the date that the input tax was incurred and no more than three years after, the return used will not determine how much of the input tax is deductible. Deductibility must always be determined by reference to the return, and the longer period, in which the input tax is incurred. See PE37600 - What longer period adjustments cannot be used for.