Businesses which sell both taxable (subject to VAT) and exempt services are referred to as partially exempt. A typical example would be sellers of domestical appliances who receive commission by selling insurance for those goods – financial services are exempt from VAT.
The input tax for the business has to be allocated between the sales which are taxable and exempt, but some inputs, such as rent for the premises will be common to both, and this input tax needs to be split in a reasonable way. The standard method to do this is to apply this formula:
However, due to coronavirus many physical shops have been closed, and the mix between the taxable and exempt sales may have changed so the current partial exemption method does not provide a fair result. HMRC has recognised situations like this, and has published a concession in Revenue & Customs Brief 4/(2021).
Businesses can now apply to use a temporary partial exemption calculation method (a ‘special’ method) without a lot of questions and delay. The special method will normally apply for one tax year, and the business will be expected to revert to the previously used partial exemption calculation method after that, unless they asked for an extension of the special method.
HMRC do not normally allow such changes to be applied retrospectively, but it considers the impact of coronavirus as an exceptional circumstance, and will allow the special method to be applied from the time that coronavirus pandemic started to affect trade.
Written by the Tax Advice Network