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Understanding partial exemption

Partial exemption has evolved into one of the more complex areas of VAT.  Unfortunately, it can be all too easy to significantly overpay or underpay VAT to HM Revenue & Customs (HMRC).

Overpaying VAT, as well as being costly to your business, can result in time-consuming, frustrating delays before the situation can be rectified. Underpaying VAT will almost certainly result in interest charges and possibly penalties being raised by HMRC.

When a business makes VAT exempt supplies it is normally required to restrict the amount of VAT it can recover.  There is a mandatory statutory standard method which must be applied.  A special method can be agreed with HMRC if this does not produce a fair and reasonable result.  There are some frameworks available for some sectors.

The standard method requires an annual adjustment as well as periodic calculations.  There is also an override if the recovery is not ‘fair and reasonable’.

HMRC have specialist officers who consider partial exemption method applications which reflects the level of complexity.

At UHY Hacker Young, our experienced in-house VAT specialists can provide straightforward advice on your partial exemption position, suggesting improvements where appropriate, and assisting in minimising the cost to your business of irrecoverable VAT.

Our advice will always be commercial and we will never suggest anything which we consider could cause reputational risk.

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