Partially exempt VAT registered businesses affected by coronavirus (COVID-19)

There is an accelerated process for VAT registered businesses to request temporary alterations to their partial exemption methods (including combined methods) to reflect changes to their business practices because of the coronavirus (COVID-19) pandemic.

Businesses who make a mixture of taxable and exempt supplies can only recover input tax to the extent that it is used in making taxable supplies. Residual input tax (VAT incurred on purchases used to make both taxable and exempt supplies) must be apportioned using a fair and reasonable method to calculate the percentage which is recoverable.

The standard method, based on the value of taxable supplies made as a proportion of all supplies made by the business, is the default method. A Partial Exemption Special Method (PESM) may, however, be used if HMRC is satisfied that it would produce a fairer reflection of the use of residual input tax than the standard method. Proposed PESMs must be approved by HMRC before they can be used.

Businesses using the standard method may, in any given tax year, find that their actual deductible input tax differs significantly from that calculated based on the use of input tax in making taxable supplies. Where this difference exceeds £50,000, or 50% of the residual input tax and £25,000, they must account for the difference between the 2 amounts by applying the standard method override.

A special method override may be required when an existing PESM is found to be unfair. A business can serve a Special Method Override Notice on HMRC, or HMRC can serve one on the business.

HMRC will be using an accelerated process to make sure coronavirus-related changes to partial exemption methods are considered, and where appropriate, approved swiftly.

Requests for such changes should be sent to the email address: PESMcovid19@hmrc.gov.uk.

All PESM requests must be accompanied by a declaration that the method proposed is fair and reasonable. An example of the format this should take is available in appendix 1 of Partial Exemption (VAT Notice 706).

Where HMRC are satisfied that the aim of the proposal is to address coronavirus issues only, in order to facilitate a quick decision, HMRC will restrict its enquiries to how that proposal addresses those issues. Where there may be significant risk that the remainder of the existing method produces an overall result which is not fair and reasonable, further examination of that method will be considered.

HMRC will apply normal scrutiny to method requests where there is a risk the accelerated process is being used to increase recovery for businesses whose activities have not been directly affected by coronavirus.

See: https://www.gov.uk/government/publications/revenue-and-customs-brief-4-2021-partially-exempt-vat-registered-businesses-affected-by-coronavirus-covid-19/