Glossary · UK
What is Partial Exemption (VAT)?
VAT rules applying to businesses making both taxable and exempt supplies -- only input VAT attributable to taxable supplies is reclaimable; exempt-supply input VAT is blocked.
Full Definition
Partial exemption applies to VAT-registered businesses that make both taxable supplies (standard, reduced, or zero-rated) and exempt supplies. Since input VAT can only be recovered on costs related to taxable supplies, partially exempt businesses must apportion their input VAT. The default approach is the Standard Method: reclaimable input VAT is calculated as a proportion of taxable turnover to total (taxable + exempt) turnover. For residual input VAT (costs not directly attributable to either taxable or exempt supplies), the same proportion is applied. If the total input VAT attributable to exempt supplies is de minimis -- below £625 per month on average AND below 50% of total residual input tax -- the business can recover it in full. This de minimis limit has not changed for many years. Businesses with more complex structures can apply for a Special Method from HMRC to produce a fairer result. Partial exemption calculations must be carried out on a tax period basis and an annual adjustment (the annual adjustment) is made at the end of the partial exemption tax year. Partial exemption is commonly encountered in financial services, insurance, property letting, healthcare, and education, where significant exempt supplies are made alongside incidental taxable ones.