Nick Davies explains the rule around VAT partial exemption and business non-business.
Apart from land and property, this is probably the most complex and misunderstood area of VAT for accountants, tax advisors and businesses, despite the potential implications of how exempt and non- business activities can and will affect the VAT recovery position.
Having established that there is a potential issue, the same businesses and their advisers also frequently fail to take account of the steps they can legitimately take to maximise recovery whilst remaining on the correct side of the law.
While looking seemingly straightforward, these issues are sufficiently complicated to justify HMRC having specialist teams purely to deal with them and the many tax avoidance schemes that stem from them. The issues surrounding partial exemption and business non-business activities result in significant assessments being raised by HMRC, together with substantial penalties. Therefore it is vital that businesses and their agents consider the liability of all of the supplies they make and how this will impact on their VAT recovery position.
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