• in-year provisional recovery rate
• early annual adjustment
• use-based option for new partly exempt businesses
• widening the scope of the standard method
The first three changes are optional, and businesses can benefit from them without seeking approval from HMRC. However, the fourth change is compulsory and widens the scope of the standard method to include all supplies except investment gold.
1. In-year provisional recovery rate
This change allows existing partially-exempt businesses to use the previous tax year’s last annual adjustment percentage as a provisional rate for the current year. HMRC consider this to be the normal default position but it is optional. The annual adjustment at the end of the current year eventually corrects any differences, and then becomes the provisional rate for the next year, and so on.
This reduces the administrative burdens on businesses as only one partial exemption calculation per year has to be made rather than five. The downside of this change is that a business could conceivably have a large under or overclaim of input tax at the end of the tax year that could adversely affect cashflow. Therefore this provision is best used by businesses that’s partial exemption position remains fairly steady year to year. This provision can only be adopted for a full tax year, i.e. you cannot chop and change throughout the year.
2. Early annual adjustment
This change allows a business to carry out an annual adjustment in the fourth quarter of its tax year rather than in the first quarter if the following tax year. This is particularly useful if a business is due a refund under the annual adjustment as it can be obtained three months earlier.
3. Use-based option for new partly exempt businesses
The new rules enable a new partly exempt business to recover its input tax on the basis of use in the following situations:
• During its 'registration period' – which is the period from the date of registration to the day before the start of its first full partial exemption tax year
• During its first full tax year after the end of its registration period (provided it incurred no exempt input tax in that period)
• During any tax year, provided it did not incur input tax relating to exempt supplies in its previous tax year (i.e. it was not partially exempt in the previous tax year).
If this method is adopted, a business must calculate its annual adjustment using a use-based method.
On the downside HMRC and a business might not agree on what is a use-based recovery of input tax and could raise an assessment for any overclaimed input tax.
4. Widening the scope of the standard method
This change is the compulsory one, and will affect businesses that make:
• supplies of services to non-UK customers
• certain financial supplies such as shares and bonds
• supplies from non-UK establishments