Once a Year
Depending on your VAT return quarters, your partial exemption year ends in March, April or May. You recalculate the figures during the VAT period following the end of your partial exemption year and any adjustment goes on that return. So, the adjustment will appear on the returns ending in June, July or August. If you are newly registered for VAT your partial exemption ‘year’ runs from when you are first registered to either March, April or May of the following year depending on your quarter ends.
The majority of businesses use what HMRC calls ‘the standard method’. The example below illustrates this method.
Example
In the partial exemption year beginning 1 April 2010, X Limited made the following supplies:
| Total ex VAT | S/R ex VAT | Exempt | |
| 1st Quarter | £433,005 | £390,000 | £53,005 |
| 2nd Quarter | £352,610 | £267,998 | £84,612 |
| 3rd Quarter | £535,867 | £495,789 | £40,078 |
| 4th Quarter | £756,986 | £698,326 | £58,660 |
| Totals | £2,088,468 | £1,852,113 | £236,355 |
Input VAT for the year is analysed as follows:
Attributable to taxable supplies | Attributable to exempt supplies | Remaining Input VAT | Total Input Tax | |
| 1st Quarter | £36,409 | £1,847 | £1,751 | £40,007 |
| 2nd Quarter | £20,245 | £311 | £3,212 | £23,768 |
| 3rd Quarter | £34,698 | £1,195 | £1,963 | £37,856 |
| 4th Quarter | £69,707 | £1,975 | £2,357 | £74,039 |
Totals | £161,059 | £5,328 | £9,283 | £175,670 |
Having done the quarterly calculations the exempt input VAT was identified as follows:
1st Quarter = £2,093 - Exceeds quarterly limit and cannot be reclaimed.
2nd Quarter = £1,082 - Less than quarterly limit and can all be reclaimed.
3rd Quarter = £1,333 - Less than quarterly limit and can all be reclaimed.
4th Quarter = £2,140 - Exceeds quarterly limit and cannot be reclaimed.
The Annual adjustment is carried out on the June 2011 VAT return. Add up all the figures from the four quarters and recalculate to see if there is any under or over claim.
Proportion of residual input VAT deductible:
1,852,113 = 88%
2,088,468
9,283 x 88% = £8,169
Exempt input VAT = £5,328 + £1,114* = £6,442
*£9,283 - £8,169
This is less than the de-minimis limit for the year and unclaimed input tax can be reclaimed on this return. Total additional input VAT to reclaimed on June return is (£175,670 – £171,437) £4,233.
Annual adjustments are not errors and so do not have to be disclosed under the Error Correction procedure. They are just another entry for the VAT return.
Practical Tip
If you don’t remember to do your partial exemption annual adjustment you may be losing out on some input VAT that you could have claimed, as in our example.
By Andrew Needham
