The statutory activities of local authorities are outside the scope of VAT. This means that they cannot recover VAT incurred in delivering those activities. To address this, section 33 of the VAT Act 1994 allows local authorities to recover:
Insignificant means that the exempt input tax should be no more
than £625 per month on average (the de-minimis limits), or
should not exceed 5% of the total input VAT incurred by a local
authority, whichever if the greater. In practice most local
authorities use the 5% rule. If the partial exemption limit is
exceeded, the local authority must repay all the VAT it has
recovered in relation to its exempt supplies during the financial
year. Further guidance can be found in
V1-14 Government and public bodies.
Where local authorities set up separate companies to undertake trading activities, such companies are subject to the normal partial exemption rules covered by the rest of this volume of guidance.