Partial Exemption
Businesses which makes exempt supplies may be partially exempt (depending on the de minimis limits). A partially exempt business will be prohibited from claiming all of its input tax. A calculation is required to determine the amount of a claim which is blocked. The majority of businesses use what is known as “the standard method” with an annual adjustment.
Partial Exemption Special Method (PESM)
However, use of the standard method is not mandatory and a business can use a “special method” (a Partial Exemption Special Method, or PESM) that suits a business’ activities better. Any PESM has to be “fair and reasonable” and it has to be agreed with HMRC in advance. When using a PESM no rounding of the percentage is permitted and it has to be applied to two decimal places.
HMRC says fair and reasonable means it must be:
- robust, in that it can cope with reasonably foreseeable changes in business
- unambiguous, in that it can deal, definitively with all input tax likely to be incurred
- operable, in that the business can apply it without undue difficulty
- auditable, in that HMRC can check it without undue difficulty
- fair, in that it reflects the economic use of costs in making taxable and exempt supplies
Types of PESMs
The following are examples of special methods:
- sectors and sub-sectors
- multi pot
- time spent
- headcount
- values
- number of transactions
- floor space
- cost accounting system
- pro-rata
- combinations of the above methods
How to apply
You will need to provide documents with your application. These include:
- a proposal document
- a worked example of the proposal
- the latest annual adjustment calculation
- a declaration — check Appendix 1 of VAT Notice 706 for what to include in your declaration
- any additional documents
More information on the documentation a business needs provide is set out in Appendix 2 of PN706
Apply online
You will need to either:
- sign in with your Government Gateway user ID and password (if you do not have a user ID, you can create one when you first try to sign in)
- use your email address to get a confirmation code that you can use to sign in
This is done here
A glossary of partial exemption terms may be found here.