| Allocation | Allocation is the
process of distributing costs on which residual input tax is
incurred to specific sectors of the business. |
| Annual adjustment | See longer period |
| Application | A taxpayer who is partly
exempt can make an application to ask HMRC to approve the adoption
of a special method. Such an application should normally be made in
writing. |
| The application should
set out the terms of the method the taxpayer is seeking to adopt,
and the reasons why the proposed method is appropriate. |
| Apportionment | Residual input tax must
be apportioned to reflect the extent to which the goods and
services on which it is incurred are used in making onward taxable
supplies. The partial exemption method carries out this role. |
| Approve | A special method can only
be adopted if HMRC’ approve or direct its adoption by the
taxpayer. |
| Where a taxpayer makes
an application to ask HMRC to approve a special method, HMRC will
consider all the information provided and come to a decision about
whether to approve or refuse the particular application. |
| Attribution | Attribution is the
process of identifying what input tax incurred by a taxable person
relates to his taxable supplies and may therefore be deducted. |
| The process normally
includes direct attribution and apportionment and also includes
allocation for sectorised methods. |
| Capital goods scheme | The capital goods scheme
provides for adjustments to input tax incurred on capital
items. |
| The purpose of the
scheme is to take account of changes in use of capital items
between the making of taxable supplies and exempt supplies in
subsequent intervals. |
| Capital items | Capital items are
certain high value capital expenditure in respect of computers and
land/buildings that fall within the scope of the capital goods
scheme. |
| Clawback | The clawback provision
applies where a taxpayer claimed input tax on goods or services
and: |
|
- intended using them in making taxable
supplies but in the event uses them, or forms an intention to use
them in making exempt supplies, or both taxable and exempt
supplies; or:
|
|
- intended using them to make taxable and
exempt supplies but in the event uses them, or forms an intention
to use them to make only exempt supplies; and:
|
|
- the change of intention occurs within six
years of the beginning of the period covered by the VAT return in
which the original intention was formed.
|
| Costs | Costs (purchases,
inputs or expenditure) are goods and services supplied to (bought,
received, self supplied or imported by) a taxpayer. |
| Cost components | The cost components of a
particular supply are all the costs that are actually incurred in
making that supply. The goods or services in question must have a
direct and immediate link to the particular supply. |
| The ultimate aim pursued
by the taxpayer is not relevant in this respect. Only the amount of
input tax borne directly by the various costs components of a
taxable supply may be attributed to taxable supplies. |
| De facto
approval | Although an
application by a taxpayer for a special method should normally have
been in writing and similarly, where HMRC approve the application,
that would also normally be in writing, prior to 1 April 2005 they
need not have been so. |
| HMRC could give de
facto approval to use a special method, providing the taxpayer
knowingly adopted or sought to adopt a special method and HMRC were
aware of what the taxpayer was doing or seeking to do. |
| De minimis | A test designed to
allow recovery of minimal amounts of exempt input tax. |
| Deduct | A taxpayer is
entitled to deduct any input tax incurred on costs that are used or
to be used in making taxable supplies. |
| The amount is
entered on to the VAT return for the relevant prescribed accounting
period or longer period and is thereby deducted from the amount of
output tax payable to HMRC on any taxable supplies made by the
taxpayer in that period. |
| The balance is either
an amount payable to, or receivable from, HMRC. |
|
Directions | HMRC are able
to direct a taxpayer who is partly exempt to adopt, or terminate
the adoption of, a particular special method. The power to direct
is set out in regulation 102 of the VAT Regulations 1995. |
| A direction
under this regulation can only take effect from the date of the
direction or some future date. |
| In respect of
capital items falling within the capital goods scheme, HMRC are
able to direct the manner in which the extent of taxable use is
determined in subsequent intervals. |
| This power to direct is
set out in regulation 116(2) of the VAT Regulations 1995. |
| Direct and
immediate link | The test for
when a cost is linked closely enough with a taxable supply (or an
exempt supply) to be a cost component of that taxable supply is
whether there is a direct and immediate link. |
| This is a more
substantial test than there merely being a link (for most
businesses all of their activities are, to some extent at least,
linked). |
| Direct
attribution | The process
of matching input tax incurred on a particular supply to an onward
supply (or number of supplies of the same liability), which it uses
exclusively. |
| Input tax is therefore
attributed to taxable supplies (and is thus recoverable) and exempt
supplies (and is not recoverable, subject to de minimis). Any input
tax used in making both taxable and exempt supplies is termed
residual. |
|
Distortive | The term
distortive describes any income, which, if included within the
apportionment calculation of a partial exemption method would
undermine its ability to produce a fair and reasonable
outcome. |
| The term is
widely used and a distortive figure may involve an amount of VAT,
the value of a supply, or any other figure that alters the
recoverable percentage determined by the partial exemption
method. |
| It can relate
to supplies made, costs received or changed business practice. Any
distortive figures should be excluded from apportionment
calculations. |
| In the case
of the standard method, the distortive figures are specifically
excluded. In the case of special methods generally, distortive
figures should be identified as such and excluded within the terms
of the method. |
| But, where
HMRC approve or direct a special method based on outputs, no matter
what the terms of that method and its exclusions are, |
| the types of
supplies that are specifically excluded from the standard method
apportionment calculation must always be excluded from the special
method apportionment calculation. |
| Effective date of
registration | The effective date of
registration is the date from which the taxpayer is registered for
VAT determined in accordance with Schedule 1, 2, 3 or 3A to the VAT
Act 1994. |
| Exempt input tax | Exempt input tax is
defined in regulation 99(1)(a) of the VAT Regulations 1995. It is
input tax incurred on costs insofar as they are used or to be used
to make exempt supplies. |
| Although the partial
exemption method determines the value of taxable input tax, by
implication it will also determine the value of exempt input
tax. |
| A taxpayer who is
partly exempt is not able to deduct the exempt input tax unless it
falls within the de minimis limits. |
| Exempt Supplies | For the purposes of
Partial Exemption this term has a wider meaning than it otherwise
has in VAT. Exempt supplies are supplies that do not carry a right
to deduct the input tax on costs that are used or to be used in
making them. These are: |
|
- supplies within Schedule 9 of the VAT Act
1994 with no right to deduct;
|
|
- outside the scope supplies with no right
to deduct (these are supplies within the EC (and any non specified
supplies made outside the EC) which would be exempt supplies if
made in the UK).
|
| Fair and reasonable | The concept of fair and
reasonable underpins all negotiated partial exemption methods.
Indeed, the sole purpose of a partial exemption method is to
translate the concept of a fair and reasonable tax recovery into
reality. |
| The constraints and
conditions of partial exemption methods and the exclusion of
incidental supplies and distortive figures from the calculations
are designed to ensure this. |
| The concept applies
equally to both HMRC and the taxpayer. To be fair and reasonable, a
partial exemption method must meet two basic conditions: |
|
- it should accurately reflect the extent
that the goods and services on which input tax is incurred are
actually used in making taxable supplies; and
|
|
- its application should not be unduly
burdensome for the taxpayer and its accuracy should be relatively
easy to check by HMRC.
|
| Incidental | Under the standard method
or an outputs based special method, in calculating the proportion
of the residual input tax that can be reclaimed, certain prescribed
incidental supplies must be excluded from the calculation used to
determine the recoverable percentage. |
| This is because the
inclusion of the values of such supplies would unfairly distort the
calculation. |
| Although the value of
an incidental supply may be of any size; high or low, it is always
disproportionately high for the amount of residual input tax that
is incurred in its making. |
| Input tax | Input tax is defined in
section 24 of the VAT Act 1994, as the VAT incurred by a person
(who is, or is required to be registered for VAT) on costs which
are used or to be used for the purpose of the business. |
| Partial exemption | Partial exemption
concerns determining how much input tax relates to taxable supplies
and can be deducted by a taxpayer who is partly exempt. |
| It operates only after
the taxpayer has determined how much of the VAT he has incurred is
input tax and has any input tax that is blocked from
deduction. |
| Partial exemption
method | A taxpayer who is partly
exempt adopts a partial exemption method, whether the standard
method or a special method, to determine the amount of taxable
input tax which he is able to deduct. |
| Any partial exemption
method is acceptable provided it gives a fair and reasonable
result. |
| Partly exempt | A taxpayer who is partly
exempt is one who incurs exempt input tax. |
| A taxpayer who is
partly exempt must make or intend to make taxable supplies in order
to register for VAT. A taxpayer who is partly exempt will usually
therefore also incur taxable input tax. |
| Payback | The payback provisions
apply where a business has not claimed input tax on goods and
services because: |
|
- the intention was to use them in making
exempt supplies but in the event they were used, or the taxpayer
formed an intention use them in making taxable supplies or taxable
and exempt supplies; or
|
|
- the taxpayer intended to use them in
making both taxable and exempt supplies but in the event they were
used, or intended to be used in making only taxable supplies;
and
|
|
- the change of intention occurs within 6
years of the beginning of the period covered by the VAT return in
which the original intention was formed.
|
| Pot | Pot input tax is another
name for residual input tax. The term is also widely used to mean
any identified amount of residual input tax. |
| So a partial exemption
method with only one apportionment calculation is known as a single
pot method whereas a sectorised partial exemption method is known
as a multi-pot method. |
| Prescribed accounting
period | The prescribed accounting
period is defined in regulation 99(1)(b) of the VAT Regulations
1995. It is the period allocated to the taxpayer to account for VAT
through his VAT return. |
| A taxpayer normally
submits VAT returns on a quarterly or monthly basis. A taxpayer who
is partly exempt must apply their partial exemption method to each
prescribed accounting period. |
| Provisional
deduction | The provisional deduction
is the amount of taxable input tax that the taxpayer can deduct, as
determined by the partial exemption method, in the prescribed
accounting period. It is adjusted in the longer period. |
| Recoverable percentage
/ recovery rate | The recoverable
percentage or recovery rate is the deductible proportion of the
residual input tax expressed as a percentage of the total residual
input tax. |
| Registration
period | The registration period
is the period of time starting from the effective date of
registration and ending on the day before the commencement of the
first tax year. |
| Residual input tax | Residual (also known as
non-attributable or pot) input tax is the input tax on costs that
are used or to be used in making both taxable supplies and exempt
supplies and includes any input tax incurred on general
overheads. |
| In the case of partial
exemption methods based on sectors, the residual input tax may be
allocated to a number of sectors. |
| Rounding | As it is impracticable to
use recovery rates expressed to many decimal points it is normal to
round. Rounding in the standard method will be determined by the
amount of residual input tax incurred. |
| In all other instances,
the recoverable percentage must be taken to the nearest two or more
decimal places. |
| Sector | A sector is an area or
activity that may be treated separately for partial exemption
purposes. It must be clearly defined and able to be supported with
VAT accounting information. |
| A sector might be a
geographical location, a product line, a cost or profit centre, a
process centre, a development stage, an accounting entity, an
investment activity, a customer group, or even a period of
time. |
| It may also be some
combination of these. |
| Self-supplies | Self-supplies are
supplies that, under or by virtue of any provision of the VAT Act
1994, the taxpayer makes to himself. Reverse charges under the
provisions of VATA 94, s.8 are an example of self-supplies. |
| Special methods | Any partial exemption
method that is not the standard method, used to identify the
taxable element of input tax incurred. Special methods require the
approval of HMRC. |
| Special method
override | Where a special method is
producing an unfair answer, but it is currently not possible to
agree or direct a method that is fair and reasonable, either HMRC
or a taxpayer may give notice that the special method override will
apply. |
| This is set out in
regulations 102A to 102C in the VAT Regulations 1995 and states
that, |
| although the special
method calculations must still be made as normal, they will be
subject to a use based override on both prescribed accounting
period returns and in the longer period adjustment. |
| Standard method | The standard method, as
set out in regulation 101 of the VAT Regulations 1995, is the
default option over what method a taxpayer must use to calculate
their taxable input tax. |
| Subsequent intervals | The capital goods scheme
adjusts capital items for changes of use in subsequent intervals. A
subsequent interval is a period after the longer period in which
the input tax in question was first attributed and will generally
be a tax year. |
| A capital item passing
through a TOGC or a VAT grouping or de-grouping changes how the
subsequent intervals will be reckoned thereafter. |
| Tax year | A taxpayer who is partly
exempt has a tax year that is normally dependent on the prescribed
accounting period allocated to the taxpayer. |
| Where the prescribed
accounting periods are quarterly, the tax year will be a period of
12 calendar months starting on the first day of April, May or June,
depending on the specific prescribed accounting periods allocated
to the taxpayer. |
| The definition of the
‘tax year’ is set out in regulation 99 of the VAT
Regulations 1995. |
| Taxable input tax | Although taxable input
tax is not defined in law (unlike exempt input tax which is), a
taxpayer who is partly exempt is entitled to deduct any input tax
incurred in making taxable supplies and uses a partial exemption
method to determining the value of that input tax. |
| By implication, taxable
input tax is input tax incurred on costs that are used or to be
used to make taxable supplies. |
| It includes both the
input tax that is directly attributable to taxable supplies and the
taxable proportion of any residual input tax determined in
accordance with the partial exemption method. |
| Taxable supplies | The legal definition of a
‘taxable supply’ is in section 4 of the VAT Act 1994. A
taxable supply is a supply of goods and services made in the UK
other than an exempt supply. |
| Taxable supplies in the
UK are not the only supplies that carry the right to deduct
associated input tax. |
| The term taxable supplies
is often (although incorrectly unless specifically agreed) used to
include all supplies which carry a right to deduct the input tax on
costs which are used or to be used in making them. |
| The other supplies
carrying the right to deduct are:
- supplies outside the UK which would be
taxable supplies if made in the UK;
|
|
- certain outside the scope supplies that
would be exempt supplies if made in the UK, and exempt supplies
made in the UK, that are specified in the Value Added Tax (Input
tax) (Specified Supplies) Order 1999; and
|
|
- supplies of investment gold.
|
| Taxpayer | A taxpayer (business) is
a taxable person. A taxable person is a person who is, or is
required to be, registered for VAT, as defined in section 3(1) of
the VAT Act 1994. |
