In theory partial exemption is very simple: a business fully claims input tax on expenses that directly relate to its taxable activities (often referred to as ‘T’); no input tax is claimed on expenses that directly relate to exempt activities (referred to as ‘E’); and if an expense relates to both activities or is a general overhead then input tax is partly claimed using HMRC’s standard method of calculation based on turnover. This figure is usually described as ‘residual input tax’ and referred to as ‘R’. What could be simpler readers might ask? It’s a piece of cake no problem at all.
The practical reality of this controversial subject is very different. It is one of the ‘big three’ VAT issues that gives sleepless nights to both clients and advisers alongside international services – the place of supply rules – and...
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