Tax & Accounting News

New Vat Partial Exemption Rules

13/07/2009

Businesses which reclaim VAT each year under the partial exemption rules can now benefit from some new arrangements which may make it easier to claim back any overpayments.

If a business makes sales that are chargeable to either the standard rate of VAT (15%), the reduced rate (5%) or are zero-rated, they are counted as ‘taxable sales’. But if the same business also generates ‘exempt income’, for example by selling insurance, financial products or medical services, it is classed as a ‘partially exempt’ business. Such businesses can only reclaim part of the VAT they incur as part of their general business expenses.

Under the old rules, partially-exempt businesses were required to work out the rate of VAT they could recover on general expenses each quarter then, at the end of the fourth quarter, average that year’s figures out and then recalculate the VAT recovered each quarter using the new ‘average’ rate. If the business had paid more than the average figure in previous quarters, it could reclaim it on the following year’s VAT return, or if it had not paid enough, it would have to make up the difference.

Since April 2009, the rules have changed so that firms have the option of using the previous year’s average over the four quarters. This removes the need to work out a new percentage each quarter, and may reduce admin bills – but it is only an optional rule, and businesses may continue to work out the exact percentages if they prefer.

A second change to the rules means that instead of waiting to include the annual adjustment until the return in the following tax year, it is now possible to make the adjustment in the final VAT return for the year it applies. Again, the change is optional – so a business which is owed money by HMRC may well choose to claim it back straight away, but where the annual adjustment is in HMRC’s favour, a business may choose to defer the adjustment until the following year.

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