Partial Exemption Special Method

A recent First-tier Tribunal case Dynamic People Limited v HMRC [2016] UKFTT 229 (TC) brought up an interesting challenge to HMRC’s approach to VAT groups and a special method for partial exemption agreed by them.

The method used floor space to determine the taxable, and therefore, recoverable portion of input tax. When the method was agreed the company was not a member of a VAT group. On joining a VAT group, HMRC indicated that it was necessary for them to agree a new special method. The company proposed a new method similar to the old one and HMRC rejected it.

At the hearing, the First-tier Tribunal asked HMRC to confirm that they had given a direction to terminate the use of the existing special method for partial exemption. HMRC were unable to give such confirmation and simply pointed out that a previously agreed special method is automatically revoked when the trader joins a VAT group. However, in the absence of any legislative provision to that effect, the First-tier Tribunal considered that the appeal had been made on a ‘false premise’. The existing method was still operative pending the issue of a direction to terminate it by HMRC.

The case highlights the need to remain alert to HMRC directions, to ensure that the legislation is not arbitrarily applied to suit their own ends.