Changes To VAT Partial Exemption

HMRC has updated its guidance on the VAT partial exemption treatment relevant to businesses who supply goods by way of hire purchase agreements. A policy paper entitled Revenue and Customs Brief 8 (2020): change to partial exemption VAT treatment was first published on 10 June 2020 and updated on 20 August 2020.

The policy paper was released following the Court of Justice of the European Union (CJEU) judgment C-153/17 Volkswagen Financial Services (UK) Ltd.

HMRC’s view is that a business supplying goods on hire purchase should be allowed input tax recovery on its overheads where the recovery is fair and reasonable. It does not follow that the recovery will simply be fifty-fifty.

In the policy paper, HMRC provides details of its recommended method for an output values-based method of apportionment of VAT incurred on overheads. The method set out is HMRC’s preferred industry method but is not compulsory and businesses can continue to apply any fair and reasonable partial exemption method already agreed with HMRC.

A partial exemption method must produce a result which enables you to recover a proportion of input tax which fairly reflects the extent to which the purchases on which it was incurred are used to make taxable supplies (and other supplies with the right to deduct).

A partial sales and use tax exemption allows certain manufacturers, researchers and developers to pay a lower sales or use tax rate on qualifying equipment purchases and leases. PARTIAL TAX EXEMPTION. LAW CHANGES.