If you have a partly exempt business, you do not need to include all of your exempt income in the partial exemption calculation. However, what if HMRC allows you to leave out the exempt income enabling you to maximize the overall VAT recovery? This article will provide a discussion of how you can improve your VAT recovery.
The Partial Exemption
A company offering both taxable and exempt supplies can only recover the input tax on overheads according to the proportion of taxable to exempt income. The greater the amount of exempt income a company has, the less the amount of VAT on the company’s overheads and the less VAT can be recovered. This means that the less exempt income that is included in the calculation, the better the overall VAT recovery will be.
The Exempt Income
According to wtax companies tend to be unaware that some exempt income can be excluded from the partially exempt calculation legally. The reason why the HMRC allows this exclusion is that it is considered to be distortive and unfairly reduces the VAT that can be recovered.
What Items Can Be Left Out During VAT Recovery?
Capital Assets
The sale of capital assets can be eliminated from the calculation of partial exemption. Selling a property that can be considered an exempt supply may be excluded. This can be improved dramatically regarding a business’ input tax recovery. You can also remove incidental financial transactions. And these can include exemption from bank interest or any other share issues that a business undertaken to raise capital. The HMRC considers that this income arises simply as a consequence of normal business activity instead of being a separate aim in its own right; therefore, it can be excluded entirely.
VAT Grouping
If a part of the VAT group then any intercompany transactions can be ignored for certain VAT reasons. This means that the transactions can be excluded from the partial exemption calculations. For example, if you run an insurance company in a VAT group and it insures the other companies in the group, this income can be excluded.
Property Rental
Certain rental income can be exempt from the calculation of VAT providing that it is incidental to the primary business activity. For example, if a manufacturing business rents certain areas of the premises to another business as they are too big for the party’s needs, then the rental income is incidental to its main business activity. Then it can be excluded during the calculation of partial VAT exemption. Similarly, if the sole proprietor presents with an investment property and receives a rental income exempt, this would be seen in primary business activities and excluded during calculations.
Small Amounts Of Exempt Input Tax
When a business has performed the calculation of partial exemption, then it will be left with a direct attributable input tax exemption with a proportion of the input tax on the overheads that cannot be recovered. However, this cannot be obtained if the input tax is less than £625 per month and 50% of the overall VAT input. If these items are passed as part of the ‘de minimis’ test, the HMRC will allow you to recover this type of input tax. If you exceed the ‘de minimis’ restriction you will not be able to exempt any input tax.
