Partially VAT exempt businesses can vary their recovery method

24 Mar 2021

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Partially exempt businesses (those which make both taxable and exempt supplies) have been given the opportunity to consider varying their VAT recovery method if, because of the pandemic, their current VAT recovery method is not giving a fair and reasonable result.

HM Revenue & Customs (HMRC) has indicated in RCB 4/2021, published on 23 March, it will adopt an accelerated process to review and approve a request to vary a partial exemption special method without undue delay. The onus is, however, on the taxpayer to demonstrate in its submission to HMRC that the requested changes seek to address the impact that lockdown has had. If there is a suggestion a varied method is seeking to address other deficiencies in the current method, as perceived by the taxpayer, HMRC would likely apply its usual detailed scrutiny to special method requests. The brief outlines some of the detail around submitting a variation request to HMRC by email and what evidence is needed to support the position.

Businesses that use the standard method may not see the benefit of this opportunity and HMRC is encouraging them to rely on the standard method override to make input tax recovery adjustments if the standard method has not provided a fair and reasonable outcome. However, an adjustment under the standard method override is only available if the differences are significant, and therefore the opportunity here is limited. Such businesses may instead decide to apply for a special method, however that may not be reviewed and approved by HMRC under the accelerated process and may take some time to agree.

We would recommend partially exempt businesses review their position now, to take advantage of this accelerated review process. It should be noted that HMRC considers the pandemic to be an exceptional circumstance, meaning a variation to a partial exemption method may have retrospective effect, with HMRC’s approval.

Please contact us for assistance in reviewing the partial exemption position with you to determine whether a request to vary the current method would be worthwhile, or whether an adjustment under the standard method override might be available.

RCB 4/2021