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Partial Exemption Annual Adjustment – Are You Losing Out?

Partial Exemption Annual Adjustment – Are You Losing Out?
If you make exempt supplies you will be doing a partial exemption calculation at the end of each VAT period.  Some periods you will able to claim back all the VAT and in others there may be some restriction in the amount of VAT that you can reclaim.  But that is not the end of it as every year you have to recalculate the figures to see if you have claimed back too much or too little VAT.

Once a Year

Depending on your VAT return quarters, your partial exemption year ends in March, April or May.  You recalculate the figures during the VAT period following the end of your partial exemption year and any adjustment goes on that return.  So, the adjustment will appear on the returns ending in June, July or August.  If you are newly registered for VAT your partial exemption ‘year’ runs from when you are first registered to either March, April or May of the following year depending on your quarter ends.

The majority of businesses use what HMRC calls ‘the standard method’. The example below illustrates this method. 


In the partial exemption year beginning 1 April 2010, X Limited made the following supplies:

 Total ex VAT S/R ex VAT Exempt 
1st Quarter £433,005£390,000£53,005 
2nd Quarter £352,610 £267,998 £84,612 
3rd Quarter £535,867 £495,789£40,078 
4th Quarter £756,986 £698,326 £58,660 
Totals £2,088,468 £1,852,113 £236,355 


Input VAT for the year is analysed as follows:


Attributable to

taxable supplies 

Attributable to

exempt supplies  

Remaining Input


Total Input Tax
1st Quarter  £36,409 £1,847 £1,751 £40,007
2nd Quarter £20,245 £311 £3,212 £23,768
3rd Quarter  £34,698 £1,195 £1,963 £37,856
4th Quarter  £69,707 £1,975 £2,357 £74,039


 £161,059 £5,328 £9,283 £175,670


Having done the quarterly calculations the exempt input VAT was identified as follows:

1st Quarter = £2,093 - Exceeds quarterly limit and cannot be reclaimed.

2nd Quarter = £1,082 - Less than quarterly limit and can all be reclaimed.

3rd Quarter = £1,333 - Less than quarterly limit and can all be reclaimed.

4th Quarter = £2,140 - Exceeds quarterly limit and cannot be reclaimed.

The Annual adjustment is carried out on the June 2011 VAT return.  Add up all the figures from the four quarters and recalculate to see if there is any under or over claim.

Proportion of residual input VAT deductible:


1,852,113 = 88%

9,283 x 88% = £8,169

Exempt input VAT = £5,328 + £1,114* = £6,442

*£9,283 - £8,169

This is less than the de-minimis limit for the year and unclaimed input tax can be reclaimed on this return.  Total additional input VAT to reclaimed on June return is (£175,670 – £171,437) £4,233.


Annual adjustments are not errors and so do not have to be disclosed under the Error Correction procedure. They are just another entry for the VAT return.

Practical Tip

If you don’t remember to do your partial exemption annual adjustment you may be losing out on some input VAT that you could have claimed, as in our example. 

By Andrew Needham