VAT – Partial Exemption

To identify the proportion of VAT not reclaimable against partially exempt expenses

Luke Mayo avatar
Written by Luke Mayo
Updated over a week ago


If your business has a mixture of Standard/Zero rated outputs (for example most farm income), and Exempt outputs (commonly certain types of rent income), you may not be able to claim all the VAT on certain inputs that are shared expenses between both types of income, i.e. a partial claim.

Please note that any business operating a partially exempt VAT system should refer to the current documentation supplied by HMRC.

Tax Codes

In order to distinguish between different types of inputs within the accounts it is important to ensure that the correct tax code is applied to each category within a transaction.

  • Standard (S) and Zero (Z) - Where costs are fully attributable to the VAT’able element of the business and hence the VAT is fully recoverable, the categories should be set up with an S or Z VAT status as appropriate.

  • Exempt (EX) – To be allocated to exempt supplies and income – for example rent, insurance, interest etc.

  • Partial (P) – This tax code acts in a similar way to S but can be used to allocate to the pot of shared expenses i.e. between the farm (where the income is S or Z) and the rental properties where the income is EX. For example professional fees may be shared across all areas of the business so you may not be able to claim all the VAT.

  • Non-Recoverable (P1) – This tax code is used for categories where the VAT cannot be claimed back, for example property expenses allocated to your rental properties.

Data Entry

As you enter transactions take care that you allocate the correct tax code to each item.

If an expense is shared between the standard farm and the rental properties, then record it as normal, splitting out the VAT as recorded on the invoice and use the tax code P. You will get the chance to make an adjustment later after calculating the % of VAT that you are entitled to claim back.

However if the VAT on an expense is non-recoverable, allocate the gross amount to the relevant category but use the tax code P1. The VAT will be zero.

Preparing the VAT return

At the end of the period, you will need to gather the totals against each tax code and use them to calculate the % of VAT that cannot be claimed against the partial pot i.e. P.

There are a number of ways of doing this but we suggest you look at the exported General Ledger found under Reports. Alternatively lock the current VAT return which will give you access to an audit against each VAT code. The VAT period can then be unlocked again to allow you to make an adjustment.

From these figures the de minimus calculation can be applied and if necessary, the claimable % calculated. Remember to exclude any capital sales. If you are not sure of the detail of the calculation we recommend that you take professional advice.

NB once the VAT figures have been submitted to HMRC electronically you cannot make amendments to the current VAT period.

To correct the VAT return

If you fall below the de minimus limit you need take no further action as all the VAT has been correctly claimed.

If you are unable to claim a proportion of the VAT this must be removed from the VAT return using the VAT Adjustments option which is found using the + sign at the top of the screen.

Ensure that the date used is in the correct VAT period. Credit Input VAT and debit a corresponding overhead code – perhaps set one up called irrecoverable VAT.

This will reduce the amount of input VAT that you are claiming this period.

If you have any queries regarding the operation of Partial VAT, you should take professional advice.

How do I amend existing entries to correct the tax status?

The option to split Zero and Exempt VAT was introduced in November 2021. If you have entries prior to then you may need to amend them. Please see this FAQ for more details.

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