VAT partial exemption and COVID-19 – do you need to urgently propose a special method?

An established partially exempt business is likely to know within certain parameters the percentage of input VAT they should be able to recover in respect of their residual overhead costs during a normal year.

However, the last year has been far from ‘normal’ and the impact of the COVID-19 pandemic has meant that, for many, taxable income has dropped significantly. For example, both sports clubs and theatres that provide exempt services have been able to open throughout certain periods of the various lockdowns. However, the bars and restaurants situated at their premises may not have been so lucky. Therefore, taxable income for many has taken a considerable hit.

To apply the standard method and lose a significant amount of input VAT as a consequence of government enforced closure doesn’t seem fair and reasonable. The difference between the provisional in-year rate based on last year’s figures used by many and the outcome based on the actual year’s income split will often result in a substantial payment due back to HMRC.

Most businesses’ annual adjustments are about to fall due (the end of the VAT year is either March, April or May unless otherwise agreed with HMRC). HMRC have indicated that they will release guidance soon in respect of businesses proposing a ‘time-limited’ special method to minimise the impact of the pandemic. Any method proposed by a business must be ‘fair and reasonable’ and the organisation must make a declaration to HMRC to that effect.

HMRC have indicated that use of last year’s percentage may be appropriate if it is fair and reasonable to do so. We await the final published guidance and will update this blog once it’s available.

The special method must also be submitted to HMRC before the end of the VAT year in question in order to backdate the method to the start of that year. This means an organisation with a March year end (the most popular by far) has less than a month to formulate and propose a method to HMRC.

Contact us

Our specialist VAT team would be pleased to advise on partial exemption and the possibility of proposing a special method to protect your recovery. Call us on 0191 285 0321 or email advice@taitwalker.co.uk.

This blog originally appeared on that of our fellow MHA member firm, MHA Larking Gowen.