HMRC have announced swift and sympathetic support for businesses suffering unfair levels of irrecoverable VAT, due to the pandemic.

VAT registered businesses making taxable and exempt supplies are normally entitled to only partial recovery of VAT incurred on costs.   Such businesses are said to be ‘partially exempt’ and must use a partial exemption method to calculate reclaimable VAT.  For example, partial exemption often arises in the real estate sector, where a mixture of taxable and exempt income is common.  Similar rules apply to charities and not for profit organisations which often suffer irrecoverable VAT as a result of having business and non-business activities.

Many businesses have suffered reduced levels of income as a result of the pandemic or have had to change or delay planned activities.  For partially exempt businesses, this may result in additional VAT costs, where their partial exemption method has ceased to produce a fair and reasonable level of recovery, due to these unforeseen events.  For example, a landlord with a mixed portfolio of taxable and exempt properties may find that its existing method results in an unfair reduction in VAT recovery, due to temporary reductions in rental income.

HMRC recognise that businesses affected by the pandemic may need to temporarily change their partial exemption method to deal with the current situation.  Changing a method requires HMRC’s approval and is often a lengthy process, typically taking months or even years, in some cases.

In Revenue and Customs Brief 4/21, HMRC have offered swift approval of requests to make temporary changes to methods, saying they will restrict their enquiries to how the proposed changes will address issues arising from the pandemic.

The Brief suggests that past income figures or projected income could be an acceptable basis.  However, HMRC will need to be satisfied that the proposed changes achieve a fair and reasonable level of VAT recovery.

Any approval granted by HMRC will be temporary, usually for a period of one tax year, although extensions can be applied for.  At the end of the temporary approval period, the business must revert to its previous method.

HMRC will also consider applications for temporary approval of new capital goods scheme and combined business/non-business methods.

This announcement is to be welcomed and should provide much needed support for businesses suffering VAT recovery issues caused by the pandemic.


The information in this article was correct at the date it was first published.

However it is of a generic nature and cannot constitute advice. Specific advice should be sought before any action taken.

If you would like to discuss how this applies to you, we would be delighted to talk to you. Please make contact with the author on the details shown below.

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Graeme Blair - Partner


T +44 (0)20 7874 8835

Graeme helps guide businesses through the corporate tax world. He is particularly expert at issues that property companies and professional practices have to navigate and therefore often manages large and complex assignments, many of which have an international element.

As a client of Graeme's wrote "I am increasingly impressed that when I pick up the phone to Graeme I receive robust and appropriate advice."

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