It is commonplace for taxpayers to own UK property which contains a mixture of residential and commercial. For example, where a building will have commercial premises on the ground floor, and residential premises above.
These taxpayers are likely to be partially exempt for UK VAT purposes, receiving taxable income on the commercial parts where an option to tax has been notified, for example, with income being exempt from VAT on the residential parts.
Businesses are required to claim VAT in accordance with either the standard partial exemption method, or a special methodology, for which the latter needs to be agreed with HMRC to claim VAT incurred in the correct manner. In addition to the regular VAT returns, such taxpayers are required to perform an annual adjustment at the end of their ‘tax year’ (usually ending on 31 March, 30 April or 31 May, depending on the VAT stagger). However, for some businesses that have agreed a different ‘tax year’, for example, to be in line with the year end of the business, that tax year can differ from the usual tax year. Accordingly, for some UK taxpayers, this could take place on the VAT return covering the period to 30 September 2023, due for submission by Tuesday, 7 November 2023.
Partial Exemption Annual Adjustment
All partially exempt taxpayers are required to carry out a partial exemption calculation along with their VAT returns. In some periods a business may be within the de minimis limits, therefore allowing it to reclaim all of its VAT; whilst in others, there may be a restriction on the VAT that can be claimed. In addition to this, once a year such businesses will also have to calculate an annual adjustment. This is required by HMRC to ensure that businesses account for any changes in use of the property throughout the year.
Partial Exemption – Planning Opportunities
We would recommend that the Gravita VAT team carries out the annual adjustments for you as they can be long calculations which lead to retrospective VAT adjustments. As part of our assistance with your annual adjustment, we will look to identify any opportunities to make VAT savings.
There is a standard method prescribed by HMRC for calculating partial exemption adjustments. However, with agreement form HMRC, other partial exemption special methods can be used where they produce a more fair and reasonable result.
Capital Goods Scheme (CGS)
Closely associated with partial exemption, capital expenditure on land and buildings (including certain construction projects) with a value of £250,000 or more (exclusive of VAT) which was subject to VAT at the standard or reduced rate will fall within the CGS.
Where capital expenditure falls within the CGS, the asset to which that spend applies must be monitored over a period of ten years so its ongoing use can be reflected in the VAT recovery. The CGS requires adjustments to be made to the initial amount of VAT claimed to reflect the differences in the taxable/exempt use of capital items over a period of time.