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HMRC internal manual

VAT Partial Exemption Guidance

From
HM Revenue & Customs
Updated
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Other Partial Exemption issues: IPT and values-based partial exemption methods

Values-based partial exemption methods work on the premise that the consumption of VAT bearing overhead costs is proportional to the value of supplies made. If cost consumption is not proportional to value of supplies then an alternative basis might be more appropriate. Policy on the treatment of IPT in values-based methods is as follows:

  • The value of IPT must be included in the Standard Method calculation because it is part of the value of supplies for VAT purposes.
  • Under the Lloyds’ VAT arrangements the value of the IPT is specifically included in the value of supplies.
  • Unless a Special Method specifically states that the value of IPT can be excluded from calculations then the value is to be included.

Normally we would not expect insurance supplies subject to IPT to consume substantially more VAT bearing overhead costs than insurance supplies which are not subject to IPT. It is certainly unlikely that supplies subject to IPT would use 5% or 17.5% more taxed inputs than supplies not subject to IPT. Therefore, unless the activities are covered by the Lloyd’s VAT arrangements, traders can apply to use a Special Method which excludes the value of the IPT and we can approve such a method provided that it would produce a fair and reasonable recovery of input tax and would be consistently applied i.e. UK and foreign IPT/local taxes would be excluded.