Revenue and Customs Brief 4(2021) partially exempt VAT registered businesses affected by COVID-19
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Published 23 March 2021
Purpose of this brief
This brief outlines 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.
Who needs to read this
Partially exempt businesses whose trading activities have been
affected by coronavirus, as a result of which their existing partial
exemption method does not provide a fair and reasonable result.
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
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.
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 we 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
Methodology and evidence needed
Where the nature of the supplies you make has changed as a result of
coronavirus, but you anticipate moving back toward a pre-pandemic
position in due course, then HMRC is likely to accept proposals which
use representative income streams from the previous tax year to get a
fair and reasonable recovery rate. If you can demonstrate that the
prior year on its own is not representative of the use of the costs,
then a representative period of up to a maximum of the previous 3 years
may be used.
Where costs are incurred in relation to an activity that was planned
but has been delayed due to coronavirus, then projected income from the
activity may provide an appropriate method of apportionment. This
should be supported by business plans or similar commercial evidence.
Businesses using the standard method are encouraged to use the
standard method override, where it applies, rather than applying for a PESM. For businesses
using a special method, a Special Method Override Notice served by a
business on HMRC will be considered by the accelerated process where
the reason given is the impact of coronavirus.
Time limits and retrospection
Any new methods approved will have a time limit stating that,
subject to any other changes, the method will revert to the previous
calculation, or for previous standard method users will end, after this
point. The default time limit will be one tax year. If at the end of
the year it is apparent that this will not be sufficient, you must
submit a further request to continue the changes into a second tax year.
HMRC will only allow changes to partial exemption methods to be
applied retrospectively (beyond the tax year in which the proposal and
supporting declaration are received) in exceptional circumstances.
Coronavirus qualifies as an exceptional circumstance and meets the
criteria for retrospective approval.
Capital Goods Scheme
The same accelerated process will be available to businesses who use
the Capital Goods Scheme (CGS)
to calculate input tax recoverable on capital items they use for
taxable and exempt purposes. A request for a change to the method is
likely to be accepted by HMRC where:
- there is a Special CGS
method in place and there has been a temporary change of use of the CGS item as a consequence of
coronavirus, and the intention is to revert to the original use as soon
as possible after the pandemic ends
- an existing Special CGS
method is in place and it becomes unreasonable, for example, due to no
income arising from the capital item
Where the change of use is planned to continue after the pandemic
ends then the ‘new’ use would provide the correct recovery
for the pandemic-impacted tax year and there should be no need for a
change to the existing Special CGS
Where planned supplies have been prevented as a result of
coronavirus, for example the cancellation of a conference or event,
ordinarily an adjustment to the supply values used in outputs-based
partial exemption calculations would be necessary to reflect the
refunds made to the customers. Requests not to make an adjustment to
the value of supplies for such refunds will be considered
You can get more information about partial exemption methods in the HMRC partial exemption VAT manual.
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Article Published/Sorted/Amended on Scopulus 2021-03-23 23:57:29 in Tax Articles