VAT - Partial Exemption - Please help?

System · June 2005

Have to answer one further question to get through the simulations for this year, am a little confused, hoped someone out there could help. Does anyone know the ruling on partial exemption of VAT?

System · June 2005

VAT - Partial Exemption - Please help?

Had this article in my files on 'partial examption' not sure if it will help you:- A basic concept in VAT law is that input VAT (that incurred on purchases of goods or services) is only recoverable where it relates to the taxable supplies that are made, or are to be made, by that business. In the case of a business which only makes VAT exempt supplies no VAT recovery is possible and such a business cannot even be registered for VAT with HM Customs and Excise. For many businesses this poses a problem as income is received which is exempt from VAT as well as income which is subject to VAT either at the standard rate of 17.5%, the lower rate of 5% or at the zero rate. Such businesses are often referred to as partially exempt traders. The problem is usually focused on the attribution of 'mixed' costs. Whilst some VAT can be identified as 'taxable' input tax and therefore almost certainly recoverable, and some can be identified as 'exempt' input tax which is potentially irrecoverable, there remains a third category of non attributable VAT which has to be apportioned. Customs usually refer to this as 'pot' input tax. There are special rules which are intended to simplify matters for smaller businesses. The intention is to allow full VAT recovery where the 'exempt' element is relatively small within a particular VAT registered business. In practice the rules are somewhat difficult to comprehend for many people, including some VAT officers, but this short guide should help. When VAT is incurred it should be coded to one of three headings: Fully taxable: VAT incurred wholly in relation to taxable activities. Exempt input tax: VAT wholly relating to exempt income (anything that is 100% to do with a property that will generate VAT exempt income - sale or rent). Residual input tax: That VAT not entirely relating to either taxable or exempt sales. This will include the VAT on overheads and any 'mixed' items (e.g. charges incurred in relation to the businesses generally such as the telephone bills). The VAT in (1) above is fully recoverable. The VAT in (2) above is classed as exempt input tax and may not be recoverable. The residual 'pot' in (3) above has to be apportioned. VAT incurred on overheads which relate to the business as a whole will fall into this last category. The Standard Method of doing the apportionment is to determine, quarter by quarter, the % of outputs (sales) which are taxable. This %, rounded up to a whole number, is applied to the pot. The remainder of the pot is then also classified as exempt input tax and this is added to the VAT in Code 2 to determine the total amount of exempt input tax for the period. If the total of exempt input tax in the quarter is both less than Ã‚Â£1,875 and less than 50% of all the input tax incurred it can all be recovered. If the exempt VAT is below this 'de minimis' limit you are treated as being fully taxable and the business can recover all the VAT incurred. The partial exemption rules require an annual adjustment to be carried out. The actual monetary adjustment is entered to the next quarter's VAT return. This means that you have to look at the figures for the year as a whole and compare the result of this calculation to the VAT recovered quarter by quarter. The Ã‚Â£1,875 per quarter applies from the first quarter in which exempt input tax was incurred

System · June 2005

VAT - Partial Exemption - Please help?

Basically, most supplies of goods and services are standard rated for VAT. A few are reduced rate or zero rate. However, there are a substantial number of VAT exempt supplies. The effect of making such supplies can be significant in VAT terms. Firstly the income from exempt activities is excluded from the turnover for the purposes of deciding whether a person should be registered for VAT, or deregistered. Secondly, where a person is registered, he cannot reclaim all the VAT input tax incurred by his business. This is called Partial Exemption. And this is where the fun starts! The taxpayer is required to analyse his input tax into three categories: - input tax attributed entirely to vatable activities, which can be claimed in full; - input tax attributed entirely to exempt activities, which cannot be claimed; - other input tax (typically on overheads, but not entirely), of which only some can be reclaimed. It is this third category which can present problems. In the first instance, the analysis of input tax has to be accurate. A computer accounts package may have to be set up carefully to enable this to be done. A manual accounts book may need additional VAT columns.

System · June 2005

VAT - Partial Exemption - Please help?

These are all exempt supplies/services:- Land & Property Insurance Postal services Betting, gaming and lotteries Finance & credit Education Health and welfare Burial and cremation Subscriptions to trade unions, professional and other public interest bodies Sport, sports competitions and physical education Certain sales of works of art Fund-raising events by charities and other qualifying bodies Cultural services Certain supplies of goods where input tax cannot be recovered Investment gold

System · June 2005

VAT - Partial Exemption - Please help?

was it for paper 7 simulation? i need to resit one this june. Could you please send me other questions that were in the simulation. Thank you.

VAT - Partial Exemption - Please help?

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