If your business generates both taxable and exempt income, standard VAT rules won’t tell the full story. Welcome to the world of partial exemption, where calculating your VAT recovery can feel like solving a complex puzzle. Without a clear system, errors are common, and HMRC penalties can follow. Here’s how to take control and simplify the process.

The Core Problem: You Can’t Reclaim All Your Input VAT
Businesses making exempt supplies—common in finance, education, and property—cannot reclaim VAT on costs related to these activities. Shared overheads, such as rent, utilities, or accounting fees, make the calculation particularly tricky. Without a structured approach, it’s almost impossible to determine fairly how much VAT is recoverable on these shared costs.

The Calculation Headache: The Standard Method and Annual Adjustment
The “standard method” for partial exemption involves complex apportionment calculations for every VAT period. On top of that, a mandatory annual adjustment is required to reconcile the year’s figures. Mistakes in these calculations are costly—both in time and potential penalties. The repetitive, detail-intensive nature of partial exemption calculations makes errors almost inevitable without a robust system.

The Solution: A System to Restore Sanity
Managing partial exemption successfully requires a clear, repeatable process:

• Rigorous Apportionment: Define input tax as directly attributable to taxable, exempt, or residual (shared) activities using a consistent, defensible logic.
  
• A Solid Calculation Model: Use a spreadsheet or specialized VAT software to handle quarterly calculations and the complex annual adjustment accurately.
  
• Explore Special Methods: If the standard method unfairly impacts your VAT recovery, you can apply to HMRC for a Partial Exemption Special Method (PESM) tailored to your business.
  

Take Control of Your Partial Exemption Calculation
By implementing a systematic approach, your business can:

• ✅ Maximize VAT recovery with accurate, fair calculations
  
• ✅ Minimize errors, penalties, and stressful HMRC inquiries
  
• ✅ Save time and frustration with a repeatable, defensible process
  

Partial exemption doesn’t have to be a headache. With clear methods, robust tools, and expert guidance, businesses can ensure compliance while reclaiming the VAT they are rightfully entitled to. Get in touch with AccelUS today!