PE51400 - Partial Exemption powers: special method override notice: the effect of a notice and corrections required
The effect of serving a Notice is that the business must consider the result of its special method and carry out any necessary corrections as outlined below.
The corrections commence on the VAT return for the first VAT period beginning on or after the date specified in the Notice.
For longer periods, Notice corrections commence on the VAT return for the first longer period beginning on or after the date specified in the Notice. Alternatively, if a Notice is served with effect from a date mid-way through a longer period a correction under the Notice is required for the proportion of the longer period that falls after that date.
Notice corrections
To comply with a Notice a business must:
- determine the amount of deductible VAT using its current special method;
- determine the amount of deductible VAT in accordance with the principle of use; and
- account for any difference between these amounts.
In most cases the reasons given by HMRC or the business in a Notice will provide the basis for determining the necessary correction to the deductible input tax under the Notice. However, a business must still consider its whole method and determine whether there are any other aspects that would otherwise give an unfair result.
The business must consider the result of its special method in each VAT return period, including the one for the longer period adjustment. The business must ensure that, for each VAT return prepared, the amount of VAT deducted fairly and reasonably reflects the extent that costs and purchases are used or will be used in making taxable supplies.
HMRC have discretion to allow Notice corrections under a Notice to be made in a later VAT period than normally required.
What if a business wants to comply with the Notice?
Businesses receiving a Notice are most likely to be non-compliant. However, where a business wants to comply with a Notice, HMRC should assist them as far as possible, bearing in mind that this measure is potentially onerous and that our objective is that each partly exempt business should have an appropriate partial exemption method. HMRC should:
- assist the business in preparing appropriate proposals as far as is reasonable and practical;
- deal with proposals for a replacement method constructively and as promptly as possible;
- apply the discretion to allow corrections to be made in a later VAT period than normally required, if this is helpful.
Concerning the final bullet above, where for example negotiations of a replacement method are progressing satisfactorily the discretion could be used to delay Notice corrections, subject to assessment time limits. This may allow efforts to be concentrated on putting in place the replacement method. Once in force the replacement method might offer an easy means of calculating Notice corrections (or assessments) if the result is acceptable.
A business can make any form of Notice correction provided the result is a fair and reasonable attribution of input tax to taxable supplies. Their correction calculations may be entirely different to the normal PE calculations. They must nonetheless first carry out their normal PE method calculations.
What if a business does not make corrections?
If a business does not adjust the amount of VAT deducted, and HMRC conclude that a correction should have been made under the Notice, then HMRC will make the correction by way of VAT assessment. Assessments should reflect a proper attribution of input tax to taxable supplies, and be made subject to the normal rules (including best judgement) and time limits. See VAEC for more details on making assessments.
As there is no lifespan of a Notice it could in theory run indefinitely, with the business always subject to a ‘use override’. In these cases HMRC will consider whether Notice corrections or assessments made help to formulate a special method direction to bring the matter to a conclusion.