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Last updated: 30 Mar 2021
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VAT partial exemption methods and COVID-19

If your business or charity has a mix of taxable and exempt income, altered trading patterns during the coronavirus pandemic may have adversely affected the deduction of VAT under partial exemption methods, which may no longer be fair and reasonable.

If this applies to your organisation, then read on to find out what steps you need to take to see if you can claw back any costs by adjusting your partial exemption method with HMRC.

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Socrates Socratous

+44 (0)20 8037 3113
socratouss@buzzacott.co.uk
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If this applies to your organisation, then read on to find out what steps you need to take to see if you can claw back any costs by adjusting your partial exemption method with HMRC.

Guidance finally issued from HMRC

Guidance finally issued via Revenue and Customs Brief 4 2021

Over the last year thousands of businesses have been unable to trade and undertake their normal business activities, and charities have not been able to operate. HMRC have finally issued some guidance for organisations grappling with these issues - see Revenue and Customs Brief 4: partially exempt VAT registered businesses affected by coronavirus (COVID-19) - GOV.UK (www.gov.uk)

Most organisations will use the standard method, (based on the ratio that taxable income bears to total income) to determine the proportion of overhead VAT reclaimable. Others have agreed partial exemption ‘special methods’ (PESMs) with HMRC. Where a method does not produce a fair and reasonable result, it is possible in some circumstances to apply either the standard method or special method override, or apply for a revised method to address COVID-related anomalies.

Accelerated decisions by HMRC

Accelerated decisions by HMRC

HMRC advise that an ‘accelerated process’ will be used to consider applications and requests for changes to methods. These should be sent to PESMcovid19@hmrc.gov.uk.  All PESM requests must be accompanied by a declaration that the method proposed is ‘fair and reasonable’. Where they are satisfied that a change is only addressing COVID-19 effects, HMRC will only ask how the proposed change will address those issues.

Representative periods or projections

Use of representative periods or projections

Where trading is expected to go back to normal in due course, representative income streams from previous tax years up to three years back will be accepted as the basis for undertaking calculations.

In relation to proposed activities that were suspended because of COVID-19, it will be possible to submit projected income figures, supported by business plans, as a basis for recovery. A particularly useful concession is the potential to count taxable turnover that was refunded to customers when events were cancelled. All approved methods will be ‘temporary’ and businesses and charities alike will be expected to revert back to their usual method after one year - unless COVID-19 is still preventing normal activity.

Retrospection

Retrospection

Ordinarily HMRC would only approve alternative methods from the beginning of a partial exemption year, but given the exceptional circumstances of the pandemic, organisations that have missed deadlines can apply for retrospective adjustments.

Any changes to partial exemption methods may have a knock on effect on capital goods scheme (CGS) calculations, and HMRC say that the same accelerated process will be applied to requests for changes to CGS methods.

What to do next

What to do next

If your business has experienced an abnormally low recovery over the last 12 months this is a welcome opportunity to claw back some costs. We expect HMRC to allow the same concessionary treatment for charities undertaking business/non-business calculations.

When preparing applications to HMRC, it’s also a good time to consider your VAT accounting and the suitability of partial exemption calculations generally. Should you require assistance or advice on making applications to HMRC, please contact your usual VAT adviser at Buzzacott or our VAT Consultancy Partner, Socrates Socratous by completing the form below.

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