PE34500 - Partial Exemption methods: the ‘Combined’ method
Regulation 102 allows for businesses to adopt an alternative method to the standard method, normally referred to as a special method, in attributing input tax to taxable supplies made in the UK.
It is possible for special methods to work alongside, but separate from regulation 103, as regulation 101 would. It is common, however, for businesses to want approval to use a single method covering all of their calculations of input tax attributable to taxable supplies.
The Combined method gives businesses the legal right to apply, and HMRC to approve or direct, a special method that deals with input tax on foreign and specified supplies. It reduces business compliance costs and the risk of accounting errors by saving the need for a separate ‘use-based’ calculation. Regulations 103A (investment gold) and 103B (input tax on incidental financial supplies) are not affected, nor is the interaction between regulation 103 and 101.
Under previous legislation (prior to 1 April 2007), a special method could only attribute input tax to UK taxable supplies (and, by default, supplies that do not confer the right of input tax deduction). However, for administrative ease and where it did not pose a tax risk, HMRC would allow some businesses to operate methods that attribute input tax to foreign and specified supplies. The Combined method dispenses with the need for administrative agreements and gives businesses the legal right to apply for a combined method.
There are two things to be aware of. The first is that if a business elects for a Combined method, that method will attribute all of the input tax incurred by the business [except for input tax attributed under regulation 103A (investment gold) and 103B (input tax on incidental financial supplies)]. This is to avoid confusion that might otherwise arise as to which regulation recovery of input tax is made under.
The second is that the method must clearly state whether it (a) attributes input tax to UK taxable supplies (supplies falling under section 26(2)(a) of the VATA 1994) or (b) whether it attributes input tax to UK taxable supplies, foreign supplies and specified supplies (supplies falling under section 26(2)(a),(b) and (c) respectively). This is to make it clear whether or not it is a ‘Combined Method’.
A business can apply for a method that just attributes input tax to UK taxable supplies. If it does, input tax on foreign and specified supplies must be determined (prior to input tax on UK taxable supplies) under regulation 103 in accordance with the principle of use.
Sometimes the terms of a method do not specify how to recover all of the input tax it is meant to address. In these circumstances there is a ‘gap’ in the method and input tax falling within that gap is deducted on the basis of use.