Partial exemption and COVID-19

21st July 2020

Now that the current moratorium on HMRC VAT payments has come to an end, managing your VAT effectively will be a key priority in the coming months for many businesses in the Financial Services sector. VAT payments that are due to HMRC will become due on time again as normal.

As businesses prepare for the ‘new normal’ following the easing of lockdown measures in the UK, it is clear that it will take some time for businesses to return to their previous trading and income levels.

Many Financial Services businesses will be partly exempt for VAT purposes as they provide a mixture of taxable and exempt supplies, and therefore are required to apply a partial restriction to the VAT recovery of their costs. Unless otherwise agreed in writing by HMRC, the VAT year end for partial exemption purposes ends in the March, April or May VAT return periods that have just passed.

There are some simplification measures that could easily be applied which allow businesses to use the final actual VAT recovery rates from the previous VAT year as a provisional recovery rate for the upcoming VAT year. This will enable businesses to maintain the previous year’s VAT recovery position even though current trading patterns might otherwise lead to a deterioration in the VAT recovery rate under normal circumstances.

Eventually the year end calculation annual adjustment will correct the figures for the year, as at this point a recalculation based on the actual figures for the year will be required, but at least this pushes out that additional cashflow until 2021.

In addition, it may be worth considering a new special method or applying for a change in any existing special method that may have been agreed with HMRC.

If you think that the proportion of income that is taxable or exempt is likely to change in the coming months, or your current business operations do not reflect your previous trading pattern, it is worth discussing your potential opportunities to improve your VAT position with our VAT team.

If you should have any questions on the above, please contact Kamlesh Chauhan, VAT Senior Manager, at, or your usual haysmacintyre contact.

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