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HMRC internal manual

VAT Partial Exemption Guidance

Legal history and glossary of terms: history of the standard method

Date Legislation
   
August 1972 - August 1978 A business was defined as being partly exempt if it had some taxable outputs and some exempt outputs. This definition continued into 1987.
  * Work out for each tax period separate totals for taxable and exempt outputs (includes bank/building society interest, rental income, and loan interest).
  * For each tax period total the input tax on imported goods but excluding non-deductible input tax on goods bought for resale as taxable supplies in the same state.
  * Method 1: Calculate the value (excluding VAT) of taxable outputs as a % of the value (excl VAT) of total outputs. Apply this % to the total input tax to arrive at the amount of deductible input tax.
  * Method 2: Suitable for retailers and others who buy and sell goods in the same state. Extract the total input tax on goods bought for resale in the same state; this total is allowed in full as deductible input tax.
  For other inputs calculate the percentage of deductible tax as in Method 1.
  * All percentages were rounded down for the provisional accounting periods but rounded up for the annual adjustment.
September 1978 - March 1983 * Work out for each tax period separate totals for taxable and exempt outputs (includes bank/building society interest, rental income, and loan interest).
  * For each tax period total the input tax, including tax on imported goods but excluding non-deductible input tax (e.g. input tax incurred on the purchase of a car).
  If using Method 2 (see below) make a separate total of input tax on goods bought for resale as taxable supplies in the same state.
  * Method 1: Calculate the value (excluding VAT) of taxable outputs as a % of the value (excl VAT) of total outputs. Apply this % to the total input tax to arrive at the amount of deductible input tax.
  * Method 2: Suitable for retailers and others who buy and sell goods in the same state. Extract the total input tax on goods bought for resale in the same state; this total is allowed in full as deductible input tax.
  For other inputs calculate the percentage of deductible input tax as in Method 1.
  All percentages were rounded down for provisional accounting periods, but rounded up for longer period adjustment.
  Method 1: Tolerance limit on annual adjustment if amount was relatively small- 10% on the total input tax or £5.
April 1983 - March 1984 * Work out for each tax period separate totals for taxable and exempt outputs (includes bank/building society interest, rental income, and loan interest).
  * For each tax period total the input tax, including tax on imported goods but excluding non-deductible input tax (e.g. input tax incurred on the purchase of a car).
  If using Method 2 (see below) make a separate total of input tax on goods bought for resale as taxable supplies in the same state.
  * Method 1: Calculate the value (excluding VAT) of taxable outputs as a % of the value (excl VAT) of total outputs. Apply this as a % to the total input tax to arrive at the amount of deductible input tax.
  * Method 2: Suitable for retailers and others who buy and sell goods in the same state. Extract the total input tax on goods bought for resale in the same state; this total is allowed in full as deductible input tax.
  For other inputs calculate the percentage of deductible input tax as in Method 1.
  All percentages were rounded down for the provisional accounting periods, but rounded up for the longer period adjustment.
  If the bulk of the inputs could be directly related to taxable and exempt supplies, traders could apply to use the direct attribution method.
  This involved: * deducting all input tax on goods and services directly related to taxable outputs * not deducting any of the input tax on goods and services directly related to exempt outputs * using Method 1 to apportion any remaining input tax. 
April 1984 - March 1987 Total value of taxable supplies (excluding VAT) x 100%
Total value of all supplies (excluding VAT)  
  This was rounded down for provisional periods and rounded up for longer period adjustments.Alternatively traders could apply to use the direct attribution method.
  This involved; * deducting all the input tax on goods and services directly related to taxable supplies 
  * not deducting any of the input tax on goods and services directly related to exempt supplies and * using the standard method to apportion any remaining input tax.
April 1987 - March 1992 A major change occurred, to both the standard method and the definition of a partly exempt business. From this year onwards a business is partly exempt if they are a taxable person and incur exempt input tax.
  The standard method became: * Identify all supplies received and work out the extent to which they relate to taxable supplies * Reclaim any input tax on supplies used or to be used in making taxable supplies 
  * Not reclaim any input tax on supplies and imports wholly used or to be used in making exempt supplies * Not recover any input tax on supplies used or to be used in connection with any other activity.
  * The amount of input tax that could be reclaimed on any other supplies depended on the extent to which their use related to taxable supplies.
  E.g. if 30% of use related to taxable supplies, traders could recover 30% of the input tax. Traders were advised to discuss how the tax could be apportioned with their local offices.
  * The standard method involved any method of apportionment based on use, unless it was an outputs method; any outputs-based calculation was a special method.
April 1992- * Identify all supplies received and work out the extent to which they relate to taxable supplies
  * Not reclaim any input tax on supplies and imports wholly used or to be used in making exempt supplies * Not recover any input tax on supplies used or to be used in connection with any other activity.
  * Reclaim any input tax on supplies used or to be used in making taxable supplies * The amount of input tax that could be reclaimed is determined by using the percentage below:
  Total value of taxable supplies (excluding VAT) x 100%
Total value of all supplies (excluding VAT)  
 This is rounded up for provisional periods and longer period adjustments.  
April 2002 * Special Method Override introduced (see PE51000 - Special method override notices).
  * The definition of “exempt input tax” changed to mean input tax incurred on goods and services used or to be used in making exempt supplies (see PE12000 - Exempt input tax).