A UK VAT-registered business makes both taxable and exempt supplies. In a longer period, its input tax directly attributable to exempt supplies plus its exempt share of residual input tax averages £600 per month, and this amount represents 45% of its total input tax for the period. Under HMRC's partial exemption de minimis rule in VAT Notice 706, what is the result?
- The business fails the de minimis test, because £600 per month, though under £625, still counts as exempt input tax and is therefore automatically irrecoverable
- The business fails the de minimis test, because although 45% is under 50%, only the monetary limit actually matters, and any exempt input tax restricts recovery
- The business passes the de minimis test only if it also elects to use the annual test instead of the standard period-by-period test
- The business passes the de minimis test because its exempt input tax is no more than £625 per month on average and no more than half of its total input tax, so it can treat itself as fully taxable and recover that exempt input tax in full for the period
Why D? And why not the others?
Correct answer: D. The business passes the de minimis test because its exempt input tax is no more than £625 per month on average and no more than half of its total input tax, so it can treat itself as fully taxable and recover that exempt input tax in full for the period
HMRC's partial exemption de minimis rule treats a business as de minimis, and therefore able to recover all of its input tax including the exempt element, only if both of two conditions are met: exempt input tax averages no more than £625 per month, and it also amounts to no more than half of the business's total input tax for the period. Here £600 per month is under £625 and 45% is under 50%, so both conditions are satisfied and the business qualifies. The option treating £600 as automatically irrecoverable ignores that the de minimis rule exists precisely to let businesses recover a small amount of exempt input tax in full rather than restrict it, provided it stays under the thresholds. The option claiming only the monetary limit matters is wrong because HMRC's test is genuinely a two-part test; failing either the monetary limit or the percentage limit on its own is enough to fail de minimis, and passing one without checking the other is not sufficient to conclude the business qualifies. The option requiring an annual-test election misdescribes the annual test as mandatory; it is an optional alternative method of applying the de minimis rule across a longer period, not a precondition for satisfying the standard period-by-period test that this business has already met.
Source: GOV.UK: Partial exemption (VAT Notice 706)