Has your VAT recovery position been affected by COVID-19?

Whilst fully taxable businesses may have seen a reduction in income they have still been able to recover the VAT incurred in running their businesses.  Partially exempt businesses, however, may have been more adversely affected as it is most likely that their taxable activity will have reduced whilst their exempt (or non-business) activity will have continued.  VAT recovery is based on the activities in a tax year which for a lot of businesses, charities and other not-for-profit entities would be the period from April 2020 to March 2021, the period most affected by COVID-19 lockdowns.

To illustrate the issue, in a normal year, a charity which has a trading outlet (shop/ café) may have been able to recover 20% of its overhead VAT incurred on the basis of the trading income as a proportion of its total income but if the outlet was forced to close during the COVID-19 period this recovery could well have reduced to NIL.

To recognise the impact this could have, HMRC have advised that they will be prepared to agree a temporary partial exemption method for businesses affected by COVID-19, exceptionally allowing retrospection for the last tax year. Depending on circumstances this may enable prior year percentages to be used as a proxy for the affected year.

If your VAT recovery has been adversely affected by COVID-19 in this way and you would like to discuss it further please contact Colin Laidlaw or Rupert Moyle.