Advanced Taxation (UK) · Value added tax

VAT Supplies, Rates and Partial Exemption for ATX-UK

Updated 11 October 2026 · Fact-checked

VAT supplies are standard, reduced, zero-rated or exempt. Input tax is recoverable on costs used for taxable (standard, reduced, zero-rated) supplies, not exempt ones. If a business makes both, partial exemption applies. Recover input tax on a fair attribution basis, then test the exempt part against the de minimis limits.

Understand VAT Supplies, Rates and Partial Exemption

Every supply of goods or services in the UK is either taxable or exempt. Standard-rated supplies carry VAT at 20%. Reduced-rated supplies carry a lower rate. Zero-rated supplies are taxable at 0%. Exempt supplies are within the scope of VAT, but no VAT is charged on them and related input tax is generally irrecoverable. Supplies outside the scope of VAT are a separate category. The ATX-UK tax tables give the 20% standard rate. The reduced rate is not in the tables, so do not quote one unless the question gives it.

The key difference between zero-rated and exempt is input tax. A trader making zero-rated supplies makes taxable supplies. It can register, charge 0% and recover all input tax linked to those sales. A trader making only exempt supplies cannot register for VAT and cannot recover input tax. The VAT it pays on costs becomes a real cost.

Many businesses make both taxable and exempt supplies. These are partially exempt. Input tax then falls into three groups: directly attributable to taxable supplies (recover in full), directly attributable to exempt supplies (irrecoverable), and residual input tax shared between both. Residual input tax is normally apportioned using the standard method: taxable supplies ÷ total supplies, rounded up to the next whole percentage. Only the recoverable percentage of residual tax is claimed.

There is also a de minimis test. If the exempt input tax is small, the business may recover all its input tax. This saves the cost of complex calculations. Land is a common source of exempt supplies. For example, many sales and leases of existing buildings are exempt unless the owner has opted to tax. If the owner opts to tax, those supplies become standard-rated and input tax on related costs becomes recoverable.

The capital goods scheme deals with expensive capital items. It adjusts input tax recovery over several years if the proportion of taxable use changes. It applies to land and buildings, certain computer equipment, and ships, aircraft and other boats above set values. It stops a business gaining a permanent benefit from a one-off high-taxable year.

Key rules to remember

Standard rate: VAT = net price × 20%; The standard rate is in the ATX-UK tax tables. VAT-inclusive price × 20/120 gives the VAT within it.
Standard method recovery percentage: Taxable supplies ÷ total supplies (taxable + exempt) × 100, rounded up to the next whole percentage; Applies to residual input tax only. Use values excluding VAT. Do not include outside-the-scope supplies in the percentage.
Total exempt input tax: Exempt input tax = input tax directly attributable to exempt supplies + (residual input tax × exempt percentage); This is the figure tested against the de minimis limits.
De minimis test (all must be met for full recovery): Total input tax − input tax for taxable supplies ≤ £625 per month on average (£7,500 a year), and ≤ 50% of total input tax; Know the two limits. The ATX-UK tax tables do not give the £625 figure, so learn it. The test uses the total exempt input tax for the whole period. Divide by the number of months to get the monthly average, or compare it with £7,500 for a full year.
Capital goods scheme adjustment period: Land and buildings: 10 years; computers, ships, aircraft and other boats: 5 years. Annual adjustment = input tax ÷ adjustment period × change in taxable use percentage; Land and buildings bought for £250,000 or more (excluding VAT) are within the scheme. So are computers, ships, aircraft and other boats costing £50,000 or more (excluding VAT) per item. For land held under a lease, the adjustment period is the shorter of 10 years and the remaining lease term, with a minimum of 5 years for short leases.

How to solve VAT Supplies, Rates and Partial Exemption questions

Use this order for any partial exemption or supply classification question. Do not recover any input tax until you know the type of supply it relates to.

1Classify each supply: standard, reduced, zero-rated, exempt, or outside the scope. Check land supplies for an option to tax.
2Sort input tax into three groups: wholly taxable, wholly exempt, and residual. Put the figures in a short table.
3Calculate the recovery percentage on residual input tax using taxable ÷ total supplies, rounded up to the next whole percentage.
4Compute the recoverable input tax: taxable group plus residual × percentage. Compute exempt input tax as the remainder.
5Apply the de minimis test. If both limits are met, all input tax is recoverable. Otherwise recover only the amount from step 4.
6Look for assets within the capital goods scheme. Work out any adjustment for changes in taxable use and say when it is made.
7Finish with a short recommendation or comment on cash flow, the option to tax, or compliance, as the requirement asks.

Quickest way: Three-line partial exemption grid

When to use it: Use this on any numerical Section A or B requirement with several input tax amounts and both taxable and exempt supplies.

Write three labelled totals: taxable, exempt, residual. Add the figures from the question into each.
Work out the residual percentage, round it up, and multiply. Add that to the taxable total to get the recoverable tax.
Test the exempt amount against £625 per month and 50% of total input tax before finalising. If it passes, reclaim everything.

Common mistakes in VAT Supplies, Rates and Partial Exemption

Treating zero-rated and exempt supplies as the same.
Both show no VAT on the invoice, so they look identical.
Fix: Remember the input tax. Zero-rated supplies allow full recovery. Exempt supplies block recovery. Say this in your answer.
Rounding the recovery percentage down or to the nearest whole number.
Students round as they would in other calculations.
Fix: Under the standard method, always round up to the next whole percentage.
Including VAT in the supply values used for the percentage.
Invoices often show gross amounts.
Fix: Use values excluding VAT, and exclude supplies outside the scope of VAT from the fraction.
Applying the percentage to all input tax rather than just residual.
The rule is remembered without the grouping step.
Fix: Take directly attributable tax out first. Taxable is recovered in full and exempt is not recovered. Then apportion what is left.
Applying the de minimis test but ignoring that the test fails if either limit is exceeded.
Students check only the monthly £625 figure.
Fix: Both conditions must be met. Exempt input tax must be no more than £625 a month on average and no more than 50% of total input tax.
Forgetting the option to tax on commercial land and buildings.
Students treat all land sales and lettings as exempt.
Fix: Check the question for an option to tax. If made, the supply is standard-rated and related input tax becomes recoverable.

Worked examples

Example 1

Delta Ltd makes standard-rated supplies of £400,000 and exempt supplies of £100,000 in a year (both excluding VAT). Its input tax is: £30,000 wholly for taxable supplies, £6,000 wholly for exempt supplies, and £20,000 residual. Calculate the recoverable input tax and say whether the de minimis test lets Delta recover everything.

Show the solution

Total supplies = £400,000 + £100,000 = £500,000. Taxable proportion = £400,000 ÷ £500,000 = 80%, already a whole number.
Residual recoverable = £20,000 × 80% = £16,000. Residual irrecoverable = £4,000.
Recoverable input tax = £30,000 + £16,000 = £46,000.
Exempt input tax for the year = £6,000 + £4,000 = £10,000.
Total input tax = £30,000 + £6,000 + £20,000 = £56,000. Exempt input tax as a share = £10,000 ÷ £56,000 = 17.9%, below 50%.
The limit is £625 per month on average, which is £7,500 for a full year. This limit is not in the tax tables, so learn it. The test uses the total exempt input tax for the year: £10,000 ÷ 12 = £833 a month, above £625. Equivalently, £10,000 is above £7,500. The de minimis test fails.

Answer: Recoverable input tax is £46,000. The de minimis test fails because exempt input tax of £10,000 for the year (an average of £833 a month) exceeds the limit of £7,500 a year (£625 a month). Delta cannot recover the £10,000 exempt input tax.

Example 2

Echo Ltd makes standard-rated supplies of £330,000 and exempt supplies of £70,000 in a year (excluding VAT). Residual input tax is £8,000. Input tax wholly for taxable supplies is £25,000 and wholly for exempt supplies is £1,000. Calculate the recoverable input tax.

Show the solution

Total supplies = £330,000 + £70,000 = £400,000.
Taxable proportion = £330,000 ÷ £400,000 = 82.5%. Round up to 83%.
Residual recoverable = £8,000 × 83% = £6,640. Residual irrecoverable = £1,360.
Exempt input tax for the year = £1,000 + £1,360 = £2,360.
Total input tax = £25,000 + £1,000 + £8,000 = £34,000.
The de minimis test is applied to the whole year. The monthly average is £2,360 ÷ 12 = £197, below £625. Equivalently, £2,360 is below the annual limit of £7,500 (£625 × 12).
£2,360 is about 6.9% of £34,000, below 50%. Both limits are met.

Answer: The de minimis test is met for the year, so Echo can recover all £34,000 of input tax, including the £2,360 exempt input tax.

Exam tips

Show the three-way split of input tax in a small table. Marks go for classification even if arithmetic slips.
Always state the reason: exempt supplies block recovery, zero-rated supplies do not. Use that wording in advice requirements.
In land scenarios, look for the option to tax, new buildings and capital goods scheme thresholds. These are the usual hooks.
Round the percentage up, then test de minimis. Show both limits. Section A professional skills marks reward a clear recommendation.
Say when information is missing, such as a reduced rate not given in the question, and state your assumption.

Practice questions from Value added tax

VAT Supplies, Rates and Partial Exemption: frequently asked questions

What is the difference between zero-rated and exempt supplies for VAT?

Zero-rated supplies are taxable at 0%, so the trader can register and recover related input tax. Exempt supplies are within the scope of VAT but no VAT is charged, and the related input tax is generally irrecoverable. This is why zero-rating is usually more favourable.

How do I apply the de minimis test in ATX-UK?

Work out the total exempt input tax for the period, including the exempt share of residual tax. If it is no more than £625 a month on average (£7,500 for a full year) and no more than 50% of total input tax, all input tax is recoverable. Both conditions must be met.

When does the capital goods scheme apply?

It applies to certain high-value capital items: land and buildings, computers, and ships, aircraft and other boats. Input tax recovery is reviewed over the adjustment period. If the taxable use proportion changes, a yearly adjustment is made.

Does the option to tax matter for partial exemption?

Yes. Without an option to tax, many land supplies are exempt and limit input tax recovery. With an option to tax, the supply becomes standard-rated and the related input tax can usually be recovered.