Our last post on the VAT Margin Scheme received a lot of response, and many of you requested more information on the VAT Partial Exemption Scheme. Here is a detailed guide on this important topic.
Definition
The VAT Partial Exemption Scheme applies to businesses that make both taxable (including zero-rated) and exempt supplies. It allows these businesses to reclaim VAT incurred on purchases related to taxable supplies while limiting the reclaimable VAT on purchases related to exempt supplies.
Who Should Use the Partial Exemption Scheme?
Businesses with mixed supplies, such as:
- Financial Services Firms: Banks, insurance companies.
- Healthcare Providers: Clinics offering medical and cosmetic treatments.
- Educational Institutions: Schools with education and after-school programs.
The De Minimis Rule
The De Minimis Rule provides a simplified approach for small amounts of exempt input VAT. In the UK, if exempt input tax is less than £625 per month on average (or £7,500 per year) and less than 50% of the total input tax for the period, all VAT can be reclaimed.
Annual Adjustment
An annual adjustment is a year-end reconciliation to ensure the correct amount of VAT is reclaimed by comparing provisional quarterly reclaims to the actual taxable use of goods and services.
Splitting VAT Input into Three Categories
Businesses need to categorize their VAT inputs as follows:
- 100% Vatable Supplies: VAT on purchases solely for taxable supplies.
- 100% Exempt Supplies: VAT on purchases solely for exempt supplies.
- Mixed Supplies: VAT on purchases for both taxable and exempt supplies.
The Partial Exemption Formula applies only to mixed supply input VAT.
Disallowable VAT
Disallowable VAT refers to VAT on expenses that cannot be reclaimed, appearing in the balance sheet and profit and loss account. Examples include VAT on non-business expenses or items with both business and private use.
Exempt vs. Fully Taxable Items
- Exempt Items:
- Financial services: Loans, insurance
- Education: Tuition from eligible institutions
- Health services: Medical treatments by registered professionals
- Fully Taxable Items:
- Goods: Electronics, clothing, furniture
- Services: Legal, consultancy, accounting
- Retail items: Restaurant food, general retail goods
Example of VAT Partial Exemption Calculation
- Total VAT Incurred: £10,000
- Categorize Inputs:
- VAT on 100% vatable supplies: £4,000
- VAT on 100% exempt supplies: £2,000
- VAT on mixed supplies: £4,000
- Proportions: Taxable Supplies: 60%, Exempt Supplies: 40%
Reclaimable VAT Calculation for Mixed Supplies:
- 60% of £4,000 = £2,400
Total Reclaimable VAT:
- VAT on 100% vatable supplies: £4,000
- VAT on mixed supplies: £2,400
So, you can reclaim £6,400 of the VAT incurred.
Conclusion
The VAT Partial Exemption Scheme helps businesses making both taxable and exempt supplies to accurately apportion and reclaim VAT on their purchases. Understanding exempt vs. fully taxable items, making annual adjustments, and proper compliance are crucial. For personalized advice or assistance with your VAT partial exemption calculations, our team of experts is ready to help.
Disclaimer
This post provides general information and does not constitute professional advice. For tailored guidance, please consult with a qualified VAT advisor.
