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HMRC internal manual

VAT Partial Exemption Guidance

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HM Revenue & Customs
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Lloyd's VAT arrangements: template for letter of approval of a Partial Exemption special method

Dear

_____________[Enter name of the business]

VAT REGISTRATION NO. _______[Enter registration number]

PARTIAL EXEMPTION SPECIAL METHOD FOR THE RECOVERY OF INPUT TAX

Please note that this has been written as if the taxpayer was a tax group that carried out all the activities described within the Lloyd’s VAT arrangements. However the taxpayer may be a single registration in which case the body of the letter would be different and or it may do only some of the various activities described in which case it should pick the most appropriate sector which it feels reflects the use of its input tax and is fair and reasonable.

  1. Approval

Consideration has been given to your request dated ______ in which you seek approval for the use of a partial exemption special method (PESM) to determine recoverable input tax and your declaration dated _____ that to the best of your knowledge and belief your proposals are fair and reasonable. The method is set out in this letter and the attached appendices and the Commissioners approve that method (and hereby record their approval of it) subject to the conditions below.

This method has been approved under Regulation 102 of the Value Added Tax Regulations 1995. It incorporates input tax attributable to foreign and specified supplies as defined in Regulation 103 Value Added Tax Regulations 1995.

  1. Use of the method

You must use this method to calculate your recoverable input tax for all periods with effect from _________ and must continue to use it until such time as the Commissioners approve or direct the termination of its use.

You should make proposals to this office for a new method if this one no longer results in a fair and reasonable recovery of input tax. A new declaration will be needed for a new proposal.

  1. Change in business/trading patterns

This approval is given in the context of your current business structure and trading patterns as and is based on information [name of VAT group] has provided to the Commissioners. Should there be any changes in the structure of your business and/or trading patterns, which prevent this method from giving a fair and reasonable recovery of input tax, you must notify this office in writing promptly. If the only change to the current business structure is a change to the name of a company, trading style or sector/sub-sector, this approval remains extant as if the new name was substituted for the old. I would ask you to inform this office of the change or changes in writing should:

* there be any material change in the structure of your business;
* any member of [name of VAT group] cease, commence, or re-commence trading, or commence a new type of business activity;
* there be any changes in the trading patterns of any member of the VAT group, or any other changes affecting the VAT group, that might reasonably be considered to create a risk that the approved method will no longer produce a fair and reasonable recovery of input tax.;
* any group undertaking commence or recommence trading with the VAT group. For the purpose of this letter group undertakings shall have the same meaning as in section 1161, Companies Act 2006.

Planned changes in the above mentioned matters should, wherever practicable, be notified to this office at least 30 days in advance of implementation and in any event, within 30 days of implementation.

  1. Definitions

For the purpose of this method the words used shall have the meanings defined in Appendix 1, or if not defined in Appendix 1, their meaning as defined in the VAT Act 1994, or if not defined there, their normal everyday meaning.

  1. Tax year

Your tax year begins on [1st January] and ends on [31st December].

  1. Attribution and allocation

In each prescribed accounting period you shall:

  1. identify all supplies, acquisitions and imports you receive which are used, or to be used, in whole by you exclusively in making taxable supplies; the input tax thereon is recoverable;
  2. identify all supplies, acquisitions and imports you receive which are used, or to be used, in whole by you exclusively in making exempt supplies or in carrying on any activity other than the making of taxable supplies; the input tax thereon is not recoverable;
  3. identify all supplies, acquisitions and imports you receive which are used, or to be used in making supplies from establishments situated outside the UK; the input tax is deductible to the extent that it is incurred on goods or services which are used or to be used to make taxable supplies, expressed as a proportion of the whole use or intended use *.

* [The above paragraph should only be included if there is no method of apportionment relating to establishments situated outside the UK. If a method of apportionment is stated within a sector and/or sub-sector within the approval, then the following paragraph can be used.] identify all supplies, acquisitions and imports you receive which are used, or to be used in making supplies from establishments situated outside the UK; the deductible proportion of the input tax is deductible by the calculations set out in Appendix 3; *

*(the sector and/or sub-sector reference can be stated in the above paragraph);

  1. identify all supplies, acquisitions and imports you receive which are used, or to be used, both in making taxable and exempt supplies and which are used, or to be used, exclusively within a single sector or sub-sector; the input tax thereon shall be allocated in full to that sector or sub-sector;
  2. identify all supplies, acquisitions and imports you receive which are used, or to be used, both in making taxable and exempt supplies and which are not used, or to be used, exclusively within a single sector or sub-sector; the input tax thereon shall be allocated between the sectors on the basis of _____ as set out in Appendix 3 [or 4 as appropriate - see note below1];
  3. [if applicable] reallocate input tax allocated to the sectors and sub-sectors listed in Appendix 2 according to the calculations set out in Appendix 3 [or 4, as appropriate1; and
  4. attribute to taxable supplies such proportion of the input tax on such of those supplies received as are used, or to be used, by you in making both taxable and exempt supplies as is determined to be the deductible proportion of the non-attributable input tax for each sector and sub-sector by the calculations set out in Appendix 3 [or 4, as appropriate1].

1 Explanatory note: An additional appendix may be added to describe the allocation process. If so, the annexes for the individual sector apportionments will fall into Appendix 4.

[The following wording can be inserted here or as “catch all” sector:]

Non-attributable input tax incurred in respect of activities not covered elsewhere in this method is deductible to the extent that it is incurred on goods or services which are used or to be used to make taxable supplies, expressed as a proportion of the whole use or intended use.

  1. Exclusions

You must exclude from the calculations.

[Insert appropriate exclusions, based on the method(s) to be used that are likely to cause a distortion to the calculation, as applicable to the particular business].

[Include the following if there are any values based calculations]:

You must exclude from the calculations the value of any supplies specifically excluded by Regulation 101(3)(a) to (d) of the VAT Regulations 1995. You must also exclude the value of supplies in the following categories:

  1. any supply made from branches situated outside the UK;
  2. any supply of any goods or services sold on in the same state connected to the making of an advance or the granting of any credit, including for example, goods sold on by a finance house under a hire purchase agreement;
  3. any supply of goods or services made to connected persons, where the supply is acquired for the purposes of your business and supplied to the connected person without material alteration or further processing;
  4. supplies made where it is intended that the same, or equivalent, goods or services will be subsequently used by the business including for example, goods or services forming part of a sale and leaseback transaction.
  5. [Amend, exclude or add any other supplies that are likely to cause a distortion to the calculation as appropriate to the particular business]

 

  1. Supplies to connected persons

Where the value of a supply made to a connected person is either significantly less than, or significantly greater than, its open market value, then the value of the supply shall be taken to be its open market value for the purposes of this method.

  1. Percentages to be used

All ratios are to be expressed as percentages. They shall be rounded up to two decimal places in each tax period and in the longer period adjustment.

  1. Annual adjustments

A longer period adjustment must be carried out and declared in accordance with Regulation 107, Value Added Tax Regulations 1995. This adjustment should be included in the first period following the end of your tax year.

Your attention is also drawn to the provisions of the Capital Goods Scheme (Regulations 112 to 116 Value Added Tax Regulations 1995).

  1. Change of intended use

If you claim any input tax as deductible by virtue of its intended use and the use, or the intention changes, you may need to make adjustments as described in Regulations 108 to 110 Value Added Tax Regulations 1995.

  1. Requirements

You are required to:

  1. keep records to show how you have calculated your deductible input tax and enable an officer of HM Revenue and Customs to verify the amount claimed,
  2. refer to the “de minimis” limits currently in force once you have calculated the value of your non-recoverable input tax.

 

  1. Contact officer

Should you wish to discuss this letter please contact _________at the above address.

Yours