Don’t overlook the partial exemption annual adjustment

If your business is partially exempt, you will recover input VAT provisionally throughout the year using an agreed method. At the end of your VAT year, you must perform an annual adjustment to calculate the correct amount of input VAT recoverable for the full year. The adjustment compares the provisional recovery made during the year with the actual recovery based on total taxable and exempt supplies. Any difference must be included on the VAT return covering the final period of the VAT year.

In addition, you should consider whether the standard method override applies. If the standard method does not give a fair and reasonable result, you are required to use an alternative calculation. HMRC expects businesses to review this position each year. The takeaway is straightforward. If you are partially exempt, ensure the annual adjustment is calculated accurately and on time. Errors can lead to under- or over-recovery of VAT and may trigger HMRC queries if not corrected.