Revenue & Customs Brief 4 (2021) Technical Update

VAT and Partial Exemption

This Brief is important for partly exempt organisations whose trading activities have been impacted by the coronavirus pandemic, resulting in their existing partial exemption calculation methods no longer producing a “fair and reasonable result”.

Those organisations in the UK which make a mixture of both taxable and exempt supplies are partly exempt, for VAT purposes, and can only recover input tax to the extent that it relates to the provision of taxable supplies. Any VAT incurred exclusively in relation to making VAT exempt supplies is wholly irrecoverable (subject to de minimis rules) and any VAT incurred exclusively in relation to making taxable supplies is recoverable in full. VAT incurred on costs to support the business as a whole (used to make both taxable and exempt supplies) needs to be apportioned so that only VAT incurred in relation to taxable onward supplies is recoverable.  The VAT incurred relating to both taxable and exempt supplies is known as “non-attributable”.

The standard method of apportionment, bases the recovery of non-attributable VAT on the value of taxable supplies made as a proportion of all supplies made by the business. A Partial Exemption Special Method (PESM) may, however, be used if HMRC is satisfied that it would produce a fairer reflection of the use of residual input tax than the standard method. It is necessary to gain HMRC’s approval prior to switching from the standard method to a PESM or to alter an existing PESM.

There are many examples of where coronavirus has rendered existing methods unfair.

An organisation which generates a significant proportion of its taxable income through shops (including charity shops) may have seen a substantial reduction in trading over the course of the pandemic. For a partly exempt business, this might significantly restrict input VAT recovery. This point may be of particular interest to charities which generate taxable income through charity shops, the sale of donated goods by a charity being zero-rated.

Additionally, we advise several businesses which generate most of their annual taxable income from one major event such as a conference. Coronavirus may have prevented such events from taking place and this will leave many businesses with vastly different income streams.

There may also be cases where organisations that intended to make supplies covered by the VAT exemptions in relation to Cultural services, Sporting services, Education or Fund-raising events by charities and other qualifying bodies, did not make those supplies. There may be implications for these organisations regarding the recovery of non-attributable VAT incurred.

The fundamental point is that it is important to consider if your business has changed its ratio of taxable to overall supplies, or, if a PESM is in place, the effect of Covid is distortive.   In this context we have dealt with cases in which HMRC has accepted that the initial attribution of input tax to taxable supplies does not need to be revisited because those supplies did not arise (on the basis that the supplies were frustrated by circumstances outside the taxpayer’s control).  This is a complex area of VAT and we would recommend that any partly exempt business takes professional advice.

R&C Brief 4 (2021) outlines an accelerated process for VAT registered businesses to request temporary alterations to their partial exemption calculation methods to reflect changes to their trading activities because of the pandemic. HMRC will “…make sure coronavirus-related changes to partial exemption methods are considered, and where appropriate, approved swiftly”. Requests for such changes should be emailed to

HMRC has indicated that, in exceptional circumstances, it may consider the retrospective alteration of partial exemption methods. However, any alterations which are approved by HMRC under this accelerated process will have a default time limit of one tax year. If at the end of the year it is apparent that this will not be sufficient, you must submit a further request to continue the changes into a second tax year.

Capital Goods Scheme

The same accelerated process will be available to organisations which are required to recover input VAT on capital assets through the Capital Goods Scheme (CGS). HMRC has stated that a request for a change to a CGS calculation method is likely to be accepted where:

  • there is a Special CGS method in place and there has been a temporary change of use of the CGS item as a consequence of coronavirus, and the intention is to revert to the original use as soon as possible after the pandemic ends
  • an existing Special CGS method is in place and it becomes unreasonable, for example, due to no income arising from the capital item

However, HMRC is unlikely to accept changes to existing CGS methods where the change of use in the capital asset is planned to continue after the pandemic ends, for example, where a business has ceased trading from a premises, and does not intend to return to generating income at that location in the future.


If your organisation has been impacted by the coronavirus then it is essential to consider if your partial exemption calculations and any CGS calculations no longer produce a fair and reasonable outcome. This article lists some examples of the types of organisations which may be impacted but, in reality, it is essential that all partly exempt businesses consider this matter based on their own circumstances. Indeed, the taxpayer has an obligation to ensure that their partial exemption/CGS calculations produce an accurate result. Constable VAT can carry out a review of your current partial exemption and CGS calculations to establish if changes need to be implemented.

We have a successful history dealing with HMRC regarding CGS and partial exemption standard and special method applications and alterations and, where we conclude a more beneficial result for your organisation is achievable, are in a good position to prepare and submit the relevant paperwork to HMRC.

Please note that this blog post is intended to provide a general overview of the subject. No liability is accepted for the opinions it contains or for any errors or omissions. Constable VAT cannot accept responsibility for loss incurred by any person, company or entity as a result of acting, or failing to act, on any material in this blog post. Specialist VAT advice should always be sought in relation to your particular circumstance.