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Partial Exemption

Partial Exemption

Some goods and services are exempt from VAT, such as insurance and finance, education and training, and charitable fund-raising events.

If all of the goods and services you sell are exempt, your business is exempt and you won’t be able to register for VAT. This means you won’t be able to reclaim any VAT on your business purchases.

If you’re VAT-registered and incur any input tax that will be used to make exempt supplies, you’re classed as partly exempt.

Companies should operate under partial exemption if they meet both of the following conditions:

  • They’re VAT registered.
  • They purchase goods that include VAT then sell or use these goods to generate income that’s classed as VAT Exempt.

You should use this article with VAT Notice 706 – VAT Partial Exemption. If you’re using a Special Partial Exemption method, or the Standard Method Override applies, you should contact your local VAT office.

Partial Exemption – Standard Invoicing

1. Create nominal Code – EF11 – Non-reclaimed VAT

2. VAT Codes – E –  for exempt VAT on Sales

                           K – Use for items to be excluded from the calculation whether they’re taxable or exempt. For example, the sale of capital goods, incidental real estate or financial transactions and self supplies. Rate is 20%

                          E – for exempt VAT on Purchases not related to the partial scheme

                          H – For all other expenditure on which VAT is charged, that’s expenditure not relating or attributable to either vatable or exempt income. Rate is 20%

                          M – Use to enter supplier invoices that include VAT, for goods and services directly relating or attributable to your exempt income.
  For each VAT Period print and retain the VAT Analysis summary.  

Annual adjustment

Calculate the non-related Input VAT (A) To calculate the annual adjustment figure, use the same calculation for the entire tax year, rather than the VAT period.
For further information about this please refer to customs.hmrc.gov.uk

Non-related Input VAT (A) = H Purchase Invoices – H Purchase Credits + H Payments + H Journal Debits. Total Sales – Box 6 (B) – Total Non – Exempt – Box 6 -Code E = (C) Applicable percentage (D)  = ( C)/(B * 100 If H (A) <£400,000 round up % to nearest whole number. If H (A) >£400,000 round up % to nearest 2 decimal places.

Calculate the non-recoverable element of the non-related Input VAT (E)  Non-recoverable non-related Input VAT (E) = ( A) – (( A) x ( D%) ) For example, if the non-related Input VAT (A) is £10,000, and the required percentage (D) is 65 %, the calculation is as follows:
Non-recoverable non-related Input VAT = 10,000 – (10,000 x 65%) = 10,000 – 6,500 = 3,500
Calculate the Input VAT related to exempt supplies (F) (F) = VAT Code M – Input VAT

Calculate the total exempt Input VAT (G) Total exempt Input VAT (G) = Non-recoverable non-related Input VAT (E) + Input VAT related to exempt supplies (F).

Check against the De Minimis limit If your total exempt Input VAT (G) is less than the De Minimis limit, you can reclaim all of your Input VAT. The De Minimis limit is: Not more than £625 per month on average and Not more than half of your total Input VAT in the period. If the total exempt Input VAT for the period is below the De Minimis limit, relief is available and all of your Input VAT is recoverable.
If all of your Input VAT is recoverable no changes are necessary.
If the total exempt Input VAT for the period is above the De Minimis limit, relief isn’t available, which means that only part of your Input VAT is recoverable.
If only part of your Input VAT is recoverable raise a journal dated the last day of year –

If overclaimed – most likely Dr VAT account – CL01 with value   and  Cr Non-reclaimed VAT EF11 with value

If underclaimed Dr Non-reclaimed VAT EF11 with value   and  Cr VAT account – CL01 with value                 



Partial Exemption – Cash Accounting

1. Create nominal Code – EF11 – Non-reclaimed VAT
2. VAT Codes – E –  for exempt VAT on Sales      

                      K – Use for items to be excluded from the calculation whether they’re taxable or exempt. For example, the sale of capital goods, incidental real estate or financial transactions and self supplies. Rate is 20%            
    
            E – for exempt VAT on Purchases not related to the partial scheme                         

  H – For all other expenditure on which VAT is charged, that’s expenditure not relating or attributable to either vatable or exempt income. Rate is 20%       
             
            M – Use to enter supplier invoices that include VAT, for goods and services directly relating or attributable to your exempt income.   For each VAT Period print and retain the VAT Analysis summary.  


Annual adjustment  

Calculate the non-related Input VAT (A) To calculate the annual adjustment figure, use the same calculation for the entire tax year, rather than the VAT period.
For further information about this please refer to customs.hmrc.gov.uk
Non-related Input VAT ( A) = H Purchase Payments + H Purchase On A/C + H Payments – H Purchase Receipts + H Journal Debits  – this will be H as shown on the VAT Analysis Summary report.

Total Sales – Box 6 (B) – Total Non – Exempt – Box 6 -Code E = (C) Applicable percentage (D)  = ( C)/(B * 100 If H (A) <£400,000 round up % to nearest whole number. If H (A) >£400,000 round up % to nearest 2 decimal places.

Calculate the non-recoverable element of the non-related Input VAT (E)  Non-recoverable non-related Input VAT (E) = ( A) – (( A) x ( D%) ) For example, if the non-related Input VAT (A) is £10,000, and the required percentage (D) is 65 %, the calculation is as follows:
Non-recoverable non-related Input VAT = 10,000 – (10,000 x 65%) = 10,000 – 6,500 = 3,500

Calculate the Input VAT related to exempt supplies (F) F) = VAT Code M – Input VAT

Calculate the total exempt Input VAT (G) Total exempt Input VAT (G) = Non-recoverable non-related Input VAT (E) + Input VAT related to exempt supplies (F).

Check against the De Minimis limit If your total exempt Input VAT (G) is less than the De Minimis limit, you can reclaim all of your Input VAT. The De Minimis limit is: Not more than £625 per month on average and Not more than half of your total Input VAT in the period. If the total exempt Input VAT for the period is below the De Minimis limit, relief is available and all of your Input VAT is recoverable.
If all of your Input VAT is recoverable no changes are necessary.
If the total exempt Input VAT for the period is above the De Minimis limit, relief isn’t available, which means that only part of your Input VAT is recoverable.
If only part of your Input VAT is recoverable raise a journal dated the last day of year –

If overclaimed – most likely Dr VAT account – CL01 with value   and  Cr Non-reclaimed VAT EF11 with value

If underclaimed Dr Non-reclaimed VAT EF11 with value   and  Cr VAT account – CL01 with value