New accelerated HMRC process for changes to partial exemption methods
HMRC have published Revenue and Customs Brief 4 (2021): partially exempt VAT registered businesses (many of which include charities) affected by coronavirus (COVID-19). This brief gives information about an accelerated process for VAT registered businesses to request temporary alterations to their partial exemption methods (including combined methods) to reflect changes to their business practices because of the coronavirus pandemic.
Organisations who make a mixture of taxable and exempt supplies can only recover input tax to the extent that it is used in making taxable supplies. This is the case of many charities whose income can be a mixture of donations, service level agreement grants and trading income. Residual input tax (VAT incurred on purchases used to make both taxable and exempt supplies) must be apportioned using a fair and reasonable method to calculate the percentage which is recoverable.
Many charities have seen a change in their trading activity due to the pandemic, often reducing whilst being replaced by emergency funding income. This change in activity may mean the partial exemption method used before the pandemic no longer produces a fair level of input tax recovery because of the impact if COVID-19 on activities.
HMRC will be using an accelerated process to make sure coronavirus-related changes to partial exemption methods are considered, and where appropriate, approved swiftly.
Where HMRC are satisfied that the aim of the proposal is to address coronavirus issues only, in order to facilitate a quick decision, HMRC advises it will restrict its enquiries to how that proposal addresses those issues.
Any new methods approved will have a time limit stating that, subject to any other changes, the method will revert to the previous calculation, or for previous standard method users will end, after this point. The default time limit will be one tax year. If at the end of the year it is apparent that this will not be sufficient, businesses must submit a further request to continue the changes into a second tax year.
HMRC will only allow changes to partial exemption methods to be applied retrospectively (beyond the tax year in which the proposal and supporting declaration are received) in exceptional circumstances.
HMRC have confirmed coronavirus qualifies as an exceptional circumstance and meets the criteria for retrospective approval.
Who does this impact?
Any partly exempt charity that has seen a change in activity because of the impact of COVID-19 which may impact whether the current partial exemption method is fair and reasonable.
This will be of particular benefit to charities using the standard method who find that their actual deductible input tax differs significantly from that calculated based on the use of input tax in making taxable supplies and the charity can’t apply a standard method override i.e. where this difference does exceeds £50,000, or 50% of the residual input tax and £25,000.
Charities need to consider whether their current partial exemption method continues to produce a fair and reasonable result in light of the impact of coronavirus and whether it would be advantageous to request a temporary change to their partial exemption method to ensure a fair and reasonable level of VAT recovery.
How can we help?
MHA can assist by:
- Providing advice and support on partial exemption issues and the new accelerated PESM process.
- Reviewing your current partial exemption position and advising whether an alternative calculation method would be advantageous.
- Designing and evaluating alternative partial exemption methods to optimise the level of input tax recovery.
- Applying to HMRC to get approval for a new PESM.
The full HMRC brief is available here.