Partial exemption and ability to adjust for COVID-19

The VAT year end has now passed for most Financial Services businesses (in either March, April or May) and it is important to remember that the VAT year end is not necessarily the same as the financial year end. Following the VAT year end there are annual filing requirements that apply to all partly exempt businesses, which are summarised below:

• Annual adjustment: all partly exempt businesses are required to carry out an annual adjustment each VAT year which needs to be included. The VAT year end is an ideal time to review the year’s VAT accounting, particularly if your income levels were affected by COVID-19 (ie as a result of different business practices being in place pre and post COVID-19).
• Capital Goods Scheme adjustment: any VAT that has been reclaimed on capital assets must be adjusted annually for the life of the asset after the VAT year end. For VAT purposes, capital assets include commercial property costing over £250,000 (purchase and/or refurbishment) and computer hardware costing over £50,000 (which is more or less redundant nowadays). For all commercial property, the life of the asset is considered to be 10 years.

Last chance to adjust for potential COVID-19 impact

Last year HMRC published Revenue and Customs Brief 4/21 in which they announced that businesses could request temporary alterations to their partial exemption methods if the business was affected by COVID-19. This allowed for the changes to be applied from 2020 onwards and could be applied until the end of the current VAT year (ending in 2022) as long as your business was still affected throughout.

Therefore, the current annual adjustment period is the last opportunity to take advantage of these special measures by HMRC. When you review your annual adjustment calculations for the year, and if you find that your income levels and partial exemption recovery percentage has been affected by COVID-19, then there is potential scope to submit a request and make a claim to HMRC based on an alternative method. HMRC will only accept a single request to use an alternative method, so it is important to consider all years that may have been impacted if you have not already made an application to use an alternative method.

The VAT year end is the best time to review your VAT position and consider whether any improvements could be made to your VAT recovery. Even if you have agreed on a special method with HMRC it can often be worth reviewing the application of the method and whether it is still fair and reasonable for the business. Often the method will have been agreed with HMRC some time ago after which business operations may have changed significantly, especially in light of the changes businesses have gone through as a result of COVID-19.

What now?

We would recommend that your partial exemption position is reviewed to ensure you are carrying out the necessary requirements correctly and are maximising your potential VAT recovery. This is especially relevant this year because it is the last opportunity to take advantage of the special measures introduced by HMRC for businesses affected by COVID-19.

Our VAT team are experts in this area and can help you with your partial exemption requirements and establishing whether any improvements can be made to your VAT position. If you would like to discuss any of these issues further, please contact Kamlesh Chauhan, VAT Director, in our Financial Services team.