Simplified de minimis VAT tests for partial exemption

With effect from VAT periods or VAT years starting on or after 1 April 2010, two new, optional de minimis tests will be introduced to save certain partly exempt businesses the need to carry out complicated and time-consuming calculations.

They will supplement, rather than replace, the existing de minimis tests. So how do they work and who can use them?

If either of the two following tests as passed, a business is de minimis and need not carry out a full partial exemption calculation in each VAT period, although the position must still be reviewed via an annual adjustment at the end of the year. The new tests are:

Test 1 - total input tax incurred is less than £625 per month on average and total exempt supplies do not exceed 50% of total supplies

Test 2 - total input tax incurred less input tax directly attributable to taxable supplies is less than £625 per month on average and total exempt supplies do not exceed 50% of total supplies.

So a business is now de minimis if it passes either of the above tests or the existing test, although a full calculation would be required for the existing test if a business fails both of the new tests.

An annual adjustment is still required. If Tests 1 or 2 are passed for the year, the business is de minimis for the year and no further calculations are needed.

Of course, the business would need to know how much input tax for the year is directly attributable to taxable supplies in order to apply Test 2. A full annual calculation is only required where both the new tests are failed.

The annual test

A business which was de minimis in its previous VAT year, can now apply the de minimis tests just once, at the end of the current VAT year, rather than in each VAT period and when the annual adjustment is carried out (either 4 or 5 times, depending on when the annual adjustment is done). In other words, it may continue to be deemed de minimis and claim input tax in full until the end of the current year.

However, it should be aware that taking this option could produce a material liability at the year-end if it is no longer de minimis.

The conditions for applying this test are that the business must:

  • pass the de minimis test for its previous partial exemption year,
  • apply the annual test consistently throughout any given partial exemption year, and
  • have reasonable grounds for not expecting its input tax in the current partial exemption year to exceed £1 million.

If any of these conditions are failed, the de minimis tests must be applied to every VAT period under the existing rules.

These new tests follow an extensive consultation period.