Partly exempt businesses and organisations who carry out Business/Non-Business calculations

25th March 2021

HMRC has just published a Revenue & Customs Brief (the Brief) acknowledging the impact COVID-19 may have had on VAT recovery rates for partly exempt businesses. The Brief states that HMRC will allow organisations to request temporary changes to their partial exemption method to reflect changes to their business practices and VAT recovery rates as a result of COVID-19.

For organisations using the standard method, HMRC indicates that the standard method override may apply, and for organisations using special methods they say they may accept a request to use a method based on prior year figures which are more reflective of the normal trading patterns.

Amendments to methods will be time limited with a default limit of one year, after which they will revert to the previous method, though an extended period may be requested. Most importantly, HMRC states that they will only allow a change to a method which is requested after the end of the tax year in ‘exceptional’ circumstances.

The tax year of an organisation is the return period ending March, April or May depending on its return stagger. That means that organisations with calendar-quarter VAT returns have until 31 March to request an amendment to their partial exemption methods for the 2020/21 tax year. Given that the Brief was only issued on 23 March, one must hope that the late issue of this guidance is accepted by HMRC as an ‘exceptional’ circumstance.

Partly exempt organisations who have seen their recovery rates drop due to COVID-19 are strongly encouraged to seek advice as to whether they could benefit from this announcement.

A similar accelerated process will apply to the Capital Goods Scheme adjustments and HMRC have also advised that where planned events have had to be cancelled, then an adjustment to the value of the supply would normally arise in an income-based calculation to reflect refunds. HMRC have indicated that requests not to make an adjustment will be considered sympathetically.

The Brief says that this announcement will apply to combined Business/Non-Business methods, but is silent as to stand-alone Business/Non-Business methods. As the legislation states that any fair and reasonable calculation may be used for a Business/Non-Business apportionment then, by extension, it seems likely that a COVID-19 related amendment may be allowed this year.

As annual adjustments for such methods are due to be made during March-May (depending on return staggers), organisations are strongly urged to seek advice as to whether this announcement will benefit them, and what they need to do.

Phil Salmon

Partner, Co-Head of VAT
+44 20 7969 5611
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