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Solution ID:
250612141909843
Last Modified Date:
Thu Jun 12 16:18:46 UTC 2025
Taxonomy Path:
Case category//How do I...//governmental/legislative compliance
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Set up and use the Partial Exemption VAT scheme - Standard VAT - UK only
Description

Some goods and services are exempt from VAT, such as insurance, training, and charitable fund-raising events.

If you sell VAT-exempt goods or services, your business is exempt. This means you can't register for VAT or reclaim any VAT on your business purchases.

If you're VAT-registered and use input VAT to make exempt supplies, you become partly exempt.

 NOTE: Input VAT is the VAT you pay on purchases, like on purchase invoices and bank payments. Output VAT is the VAT you charge on sales, such as sales invoices and bank receipts. 

This article only applies if you're using the Standard VAT scheme. If you're using the VAT Cash Accounting scheme, follow our alternative article.

Cause
Resolution
Follow each section below to set up the Partial Exemption VAT scheme and prepare your VAT return.

Before you start

For more information on how to qualify for this scheme, follow The Partial Exemption VAT scheme - Standard VAT - UK only article.

Create a new nominal code

If you're using the Sage default nominal ledger structure, create the following nominal code. Follow the Create the partial exemption tax codes section if this code already exists.

Nominal Code Name Management report Section of report
7950 Non Reclaimed VAT Profit and Loss Overheads

Check the tax codes used

Check the following tax codes exist. You can create them using our How to create or amend a tax code article, if required.

▼ Create the partial exemption tax codes

NOTE: If you're already using any of these tax codes for other purposes, you can use the next available unused tax code instead. 

Code Rate Include in VAT Return EC Code
T6 20.00% Yes No
T12 20.00% Yes No
T13 20.00% Yes No
▼ Check the tax codes to use on transactions

Income transactions

Enter any income transactions, such as sales invoices or bank receipts, using the following tax codes:

T0 To enter zero-rated transactions.
T1 To enter standard rated transactions.
T2 To enter exempt transactions for use in the partial exemption calculations.
T5 To enter reduced rate transactions.
T6

To be excluded from the calculation whether they're taxable or exempt. For example, the sale of capital goods, incidental real estate or financial transactions and self-supplies.
T9 To enter transactions on which VAT isn't applicable, for example, bank transfers.

Expenditure transactions

Enter any expenditure transactions, such as purchase invoices or bank payments, using the following tax codes:

T0 To enter zero rated purchases.
T1 Expenditure transactions that include VAT on goods and services directly linked or are connected to your standard rated income.
T5 To enter reduced rate transactions.
T9 To enter expenditure on which VAT isn't applicable, for example, wages.
T12 For all other expenditure on where you charge VAT. That's expenditure not relating or attributable to either vatable or exempt income.
T13 To enter supplier invoices that include VAT, for goods and services directly relating or attributable to your exempt income.

 

Calculate the total exempt Input VAT

Follow each section to calculate the total exempt Input VAT to determine if it's above or below the De Minimise limit.

▼ Calculate the non-related Input VAT (Figure A)

NOTE: To calculate the annual adjustment figure, use the same calculation for the entire tax year, rather than the VAT period. For further information about this, refer to customs.hmrc.gov.uk

  1. Click VAT then click VAT Return.
  2. Click Calculate VAT Return and click the figure in Box 4.
  3. Calculate the non-related Input VAT as follows:

    Non-related Input VAT (Figure A) = T12 Purchase Invoices - T12 Purchase Credits + T12 Payments + T12 Journal Debits

  4. Click Close.
▼ Calculate the required percentage (Figure B)
  1. Click the figure in Box 6.
  2. Calculate the totals for T0, T1, T2 and T5 as follows:
    • T0 total = Sales Invoices - Sales Credits + Receipts + Journal Credits
    • T1 total = Sales Invoices - Sales Credits + Receipts + Journal Credits
    • T2 total = Sales Invoices - Sales Credits + Receipts + Journal Credits
    • T5 total = Sales Invoices - Sales Credits + Receipts + Journal Credits
  3. Using the above totals, calculate the required percentage as follows:

    Required percentage (Figure B) = (T0 + T1 + T5)   x 100
    (T0 + T1 + T2 + T5)

    If the amount of non-related Input VAT (Figure A) is less than £400,000, round up the percentage to the next whole number. If Figure A exceeds £400,000, round the figure up to two decimal places.
▼ Calculate the non-recoverable element of the non-related Input VAT (Figure C)

Calculate the non-recoverable element of the non-related Input VAT as follows:

Non-recoverable non-related Input VAT (Figure C) = Figure A - (Figure A x Figure B)

For example, if the non-related Input VAT (Figure A) is £10,000, and the required percentage (Figure B) is 72 %. The calculation is:

Non-recoverable non-related Input VAT = 10,000 - (10,000 x 72%) = 10,000 - 7,200 = 2,800

▼ Calculate the Input VAT related to exempt supplies (Figure D)
  1. Click the figure in Box 4.
  2. Calculate the Input VAT related to exempt supplies as follows:

    Input VAT related to exempt supplies (Figure D) = T13 Purchase Invoices - T13 Purchase Credits + T13 Payments + T13 Journal Debits

  3. To close the VAT Breakdown - VAT reclaimed on Purchases window, click Close.
▼ Calculate the total exempt Input VAT (Figure E)

Calculate the total exempt Input VAT as follows:

Total exempt Input VAT (Figure E) = Non-recoverable non-related Input VAT (Figure C) + Input VAT related to exempt supplies (Figure D)

You've now calculated the total exempt Input VAT. Now check this against the De Minimise limit to determine if you can reclaim all of your Input VAT. 

Check against the De Minimise limit

If your total exempt Input VAT (Figure E) is less than the De Minimise limit, you can reclaim all of your Input VAT.

The De Minimise limit is:

  • Not more than £625 per month on average and
  • Not more than half of your total Input VAT in the period

If your total exempt Input VAT for the period is below the De Minimise limit, you can recover all of your Input VAT. Follow the Reclaim all of your Input VAT steps.

If your total exempt Input VAT for the period is above the De Minimise limit, only part of your Input VAT is recoverable. Follow the Reclaim part of your Input VAT steps.

▼ Reclaim all of your Input VAT
  1. Click Settings and click Change Program Date then click Default Program Date.
  2. Enter the final day of the VAT period you're reconciling then click OK.
  3. Click VAT and click VAT Return then click Calculate VAT Return.

    The figures that appear are the correct values for the period.
  4. Once the VAT liability has been agreed, click Reconcile then post the VAT transfer journal as usual. 

You've now reclaimed all of your Input VAT under partial exemption. Under this scheme, you're also required to make an annual adjustment. Follow the steps in the Post the annual adjustment section.

▼ Reclaim part of your Input VAT
  1. Go to Settings, select Change Program Date, then Default Program Date.
  2. Enter the final day of the VAT period you're reconciling then click OK.
  3. Go to VAT, select VAT Return then click Calculate VAT Return.
  4. Click Make adjustments then in the Box 4 Adjustment column click the pencil icon.
  5. Complete the VAT Manual Adjustments window as follows:
    Reason Enter the reason for the adjustment, for example Partial Exemption annual adjustment.
    Adjustment Enter the value that you're adjusting the box by. In this case Figure E.

    If you've overclaimed VAT, reduce the value and prefix the figure with the minus sign.
  6. Click Save then click Close.
  7. Once the VAT liability has been agreed, click Reconcile then post the VAT transfer journal as usual. 

    NOTE: The amounts to transfer are those that appear on the VAT Return before entering any adjustments.

  8. Go to Nominal codes then select Journal entry.
  9. Complete the Journal Entry window as follows:
    N/C* Name Details T/C* Debit Credit
    2204 Manual Adjustments Irrecoverable VAT T9 0.00 Total exempt Input VAT (Figure E)
    7950 Non Reclaimed VAT Irrecoverable VAT T9 Total exempt Input VAT (Figure E) 0.00
    *This information is mandatory.
  10. Click Save then click Close.

You've written off the non-reclaimable portion of your Input VAT. Under this scheme, you're also required to make an annual adjustment. Follow the steps in the Post the annual adjustment section.

 

Post the annual adjustment

  1. Go to Settings, select Change Program Date, then Default Program Date.
  2. Enter the date you want to make the adjustment then click OK.
  3. Go to VAT, select VAT Return, then click Calculate VAT Return.
  4. Click Make adjustments then in the Box 4 Adjustment column click the pencil icon.
  5. Complete the VAT Manual Adjustments window as follows:
    Reason Enter the reason for the adjustment, for example Partial Exemption annual adjustment.
    Adjustment Enter the value that you're adjusting the box by.

    If you've overclaimed VAT, reduce the value and prefix the figure with the minus sign.
  6. Click Save then click Close.
  7. Once the VAT liability has been agreed, click Reconcile then post the VAT transfer journal as usual. 

    The amounts to transfer are those that appear on the VAT Return before entering any adjustments.
  8. Go to Nominal codes then select Journal entry.
  9. Complete the Journal Entry window as follows:
    • If you have overclaimed VAT, post the following journal:
      N/C* Name Details T/C* Debit Credit
      2204 Manual Adjustments Annual adjustment T9 0.00 Amount of VAT overclaimed
      7950 Non Reclaimed VAT Annual adjustment T9 Amount of VAT overclaimed 0.00
    • If you have underclaimed VAT, post the following journal:
      N/C* Name Details T/C* Debit Credit
      2204 Manual Adjustments Annual adjustment T9 Amount of VAT underclaimed 0.00
      7950 Non Reclaimed VAT Annual adjustment T9 0.00 Amount of VAT underclaimed
      *This information is mandatory.
  10. Click Save then click Close.
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