Skip to main content

Accelerated process for Coronavirus-related changes to VAT partial exemption methods

HM Revenue & Customs (HMRC) has introduced an accelerated process for businesses which need to temporarily change their partial exemption method because of the Coronavirus impact.

Businesses making exempt and taxable supplies need to restrict their input tax recovery accordingly. As now is the time for most partly exempt businesses to calculate their annual VAT adjustment, HMRC’s Revenue & Customs Brief 4 (2021) should also be considered.

HMRC recognises that due to changes to income streams or business practices caused by the pandemic, previously appropriate partial exemption methods may no longer result in a fair and reasonable amount of input tax recovery. HMRC is further aware that the time it can take HMRC to approve of a proposed partial exemption special method (PESM) may put cash-strapped businesses under additional pressure. Under the accelerated process HMRC can approve of temporary changes to a partial exemption method quickly and, exceptionally, also with retrospective effect.

Where the recoverable input tax under the turnover based method (standard method) is no longer fair and reasonable and differs significantly from the recoverable input tax calculated on a use basis, businesses must already apply a use based calculation (standard method override). Where applicable, businesses are encouraged to use these override provisions which do not require HMRC’s approval instead of applying for a PESM.

Where a business needs to submit a proposal for a PESM, the new accelerated process means that HMRC will only review how this proposal addresses the Coronavirus-related issues which should allow for quick decision making.

Businesses already using a PESM which is no longer fair and reasonable due to the pandemic can also address this using the accelerated process.

Proposed changes to a partial exemption method which relate to activities not directly affected by the Coronavirus will be subject to normal scrutiny by HMRC.

Would you like to know more?

If you would like to discuss the above, please get in touch with your usual Blick Rothenberg contact or Antje Forbrich using the details on this page.

Check the impact of the Spring Budget Statement with our Tax Calculator Visit our Spring Budget Hub