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VT Transaction+

Navigation: Value Added Tax

Partial exemption

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Introduction

Under partial exemption, if you make both taxable and exempt sales, you cannot recover input VAT on purchases that relate wholly to exempt sales, but you can on those that relate wholly to taxable sales.

For other purchases, part of the input VAT can be reclaimed based on an apportionment between taxable and exempt activities

VT Transaction+ does not have any specific features for accounting for VAT for partially exempt businesses. However, it is possible to collect all the data necessary for calculating the amounts of VAT due and recoverable. Please also refer to the HMRC VAT Notice 706.

Entering Purchases

Purchases used for making taxable sales

Input VAT on supplies exclusively used for making taxable supplies should be entered normally with the full amount of input VAT entered in the VAT box in the transaction entry dialogs

Purchases used for making exempt sales

For purchases exclusively used for making exempt sales, the gross cost should be entered in the Total box and no input VAT should be entered in the VAT box in the transaction entry dialogs.

Other purchases

Residual purchases (those that fall into neither of the above categories, for instance telephone bills or accountancy fees) should be entered using a custom transaction type (see Custom transaction types).

Initially, the full amount of input VAT should be entered (later you will make an adjustment to write-off the irrecoverable element of the input VAT, see below).

If a transaction has been entered using the wrong transaction type in error, right click on it in any report and choose Change Type from the pop-up menu).

To determine the amount of input VAT on residual purchases for a period, choose the Display>Transaction List>Daybook command and select the custom transaction type. You may need to click on the dates caption on the status bar at the bottom of the report to make it coincide with your VAT return period.

Entering sales

The amount of residual input VAT that can be recovered is usually based on the ratio of taxable sales (exc VAT) to total sales (exc VAT). This is the standard method provided by HMRC.

In order to arrive at this ratio you should enter sales transactions analysed to separate taxable and exempt sales accounts. To facilitate this you will need to create an account(s) in the income ledger for exempt sales in addition to taxable sales (Set Up>Accounts>All>New).

Adjustment for irrecoverable residual input VAT

Before preparing your VAT return, you should enter a journal to write-off the amount of residual input VAT that cannot be recovered. This number can be calculated from the ratio of taxable to total sales and the total residual input VAT per the Transaction List/Daybook report.

i.e.

 Irrecoverable percentage of residual input VAT = 100 - recoverable percentage of residual input VAT

where:

 Recoverable percentage of residual input VAT = Value of taxable sales (ex VAT) / Total value of sales (ex VAT) x 100

You can then multiply the irrecoverable percentage of residual VAT by total residual input VAT. The total residual VAT can be obtained from the Transaction List/Daybook report for the custom transaction type for residual purchases.

Using the JRN function, you can then enter a journal for the irrecoverable residual input VAT, e.g.:

6_partialexempjn l

Screenshot of a section of the journal dialog

You will need to set up a new account in the Expenses ledger for the non-recoverable input VAT, which is a cost to the business.