HMRC have announced swift and sympathetic support for businesses suffering unfair levels of irrecoverable VAT, due to the pandemic.<\/p>\n
VAT registered businesses making taxable and exempt supplies are normally entitled to only partial recovery of VAT incurred on costs.\u00a0 \u00a0Such businesses are said to be \u2018partially exempt\u2019 and must use a partial exemption method to calculate reclaimable VAT.\u00a0 For example, partial exemption often arises in the real estate sector<\/a>, where a mixture of taxable and exempt income is common.\u00a0 Similar rules apply to charities and not for profit organisations<\/a> which often suffer irrecoverable VAT as a result of having business and non-business activities.<\/p>\n Many businesses have suffered reduced levels of income as a result of the pandemic or have had to change or delay planned activities.\u00a0 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.\u00a0 For example, a landlord with a mixed portfolio of taxable and exempt properties<\/a> may find that its existing method results in an unfair reduction in VAT recovery, due to temporary reductions in rental income.<\/p>\n HMRC recognise that businesses affected by the pandemic may need to temporarily change their partial exemption method to deal with the current situation.\u00a0 Changing a method requires HMRC\u2019s approval and is often a lengthy process, typically taking months or even years, in some cases.<\/p>\n