Font Size

Revenue and Customs Brief 4(2021) partially exempt VAT registered businesses affected by COVID-19


HM Revenue and Customs -Tax Authorities

Tax Articles
Submit Articles   Back to Articles

Published 23 March 2021

Purpose of this brief

This brief outlines an accelerated process for VAT registered businesses to request temporary alterations to their partial exemption methods (including combined methods) to reflect changes to their business practices because of the coronavirus (COVID-19) pandemic.

Who needs to read this

Partially exempt businesses whose trading activities have been affected by coronavirus, as a result of which their existing partial exemption method does not provide a fair and reasonable result.


Businesses who make a mixture of taxable and exempt supplies can only recover input tax to the extent that it is used in making taxable supplies. Residual input tax (VAT incurred on purchases used to make both taxable and exempt supplies) must be apportioned using a fair and reasonable method to calculate the percentage which is recoverable.

The standard method, based on the value of taxable supplies made as a proportion of all supplies made by the business, is the default method. A Partial Exemption Special Method (PESM) may, however, be used if HMRC is satisfied that it would produce a fairer reflection of the use of residual input tax than the standard method. Proposed PESMs must be approved by HMRC before they can be used.

Businesses using the standard method may, in any given tax year, find that their actual deductible input tax differs significantly from that calculated based on the use of input tax in making taxable supplies. Where this difference exceeds £50,000, or 50% of the residual input tax and £25,000, they must account for the difference between the 2 amounts by applying the standard method override.

A special method override may be required when an existing PESM is found to be unfair. A business can serve a Special Method Override Notice on HMRC, or HMRC can serve one on the business.

Accelerated process

HMRC will be using an accelerated process to make sure coronavirus-related changes to partial exemption methods are considered, and where appropriate, approved swiftly.

Requests for such changes should be sent to the email address:

All PESM requests must be accompanied by a declaration that the method proposed is fair and reasonable. An example of the format this should take is available in appendix 1 of Partial Exemption (VAT Notice 706).

Where we are satisfied that the aim of the proposal is to address coronavirus issues only, in order to facilitate a quick decision, HMRC will restrict its enquiries to how that proposal addresses those issues. Where there may be significant risk that the remainder of the existing method produces an overall result which is not fair and reasonable, further examination of that method will be considered.

HMRC will apply normal scrutiny to method requests where there is a risk the accelerated process is being used to increase recovery for businesses whose activities have not been directly affected by coronavirus.

Methodology and evidence needed

Where the nature of the supplies you make has changed as a result of coronavirus, but you anticipate moving back toward a pre-pandemic position in due course, then HMRC is likely to accept proposals which use representative income streams from the previous tax year to get a fair and reasonable recovery rate. If you can demonstrate that the prior year on its own is not representative of the use of the costs, then a representative period of up to a maximum of the previous 3 years may be used.

Where costs are incurred in relation to an activity that was planned but has been delayed due to coronavirus, then projected income from the activity may provide an appropriate method of apportionment. This should be supported by business plans or similar commercial evidence.


Businesses using the standard method are encouraged to use the standard method override, where it applies, rather than applying for a PESM. For businesses using a special method, a Special Method Override Notice served by a business on HMRC will be considered by the accelerated process where the reason given is the impact of coronavirus.

Time limits and retrospection

Any new methods approved will have a time limit stating that, subject to any other changes, the method will revert to the previous calculation, or for previous standard method users will end, after this point. The default time limit will be one tax year. If at the end of the year it is apparent that this will not be sufficient, you must submit a further request to continue the changes into a second tax year.

HMRC will only allow changes to partial exemption methods to be applied retrospectively (beyond the tax year in which the proposal and supporting declaration are received) in exceptional circumstances. Coronavirus qualifies as an exceptional circumstance and meets the criteria for retrospective approval.

Capital Goods Scheme

The same accelerated process will be available to businesses who use the Capital Goods Scheme (CGS) to calculate input tax recoverable on capital items they use for taxable and exempt purposes. A request for a change to the method is likely to be accepted by HMRC where:

  • there is a Special CGS method in place and there has been a temporary change of use of the CGS item as a consequence of coronavirus, and the intention is to revert to the original use as soon as possible after the pandemic ends
  • an existing Special CGS method is in place and it becomes unreasonable, for example, due to no income arising from the capital item

Where the change of use is planned to continue after the pandemic ends then the ‘new’ use would provide the correct recovery for the pandemic-impacted tax year and there should be no need for a change to the existing Special CGS method.

Sales credits

Where planned supplies have been prevented as a result of coronavirus, for example the cancellation of a conference or event, ordinarily an adjustment to the supply values used in outputs-based partial exemption calculations would be necessary to reflect the refunds made to the customers. Requests not to make an adjustment to the value of supplies for such refunds will be considered sympathetically.

More information

You can get more information about partial exemption methods in the HMRC partial exemption VAT manual.

About the Author

© Crown Copyright 2021.

A licence is needed to reproduce this article and has been republished for educational / informational purposes only. Article reproduced by permission of HM Revenue & Customs.

Follow us @Scopulus_News

Article Published/Sorted/Amended on Scopulus 2021-03-23 23:57:29 in Tax Articles

All Articles

Copyright © 2004-2021 Scopulus Limited. All rights reserved.