Partial exemption

In this lesson

1. 0:00 Partial exemption overview and core rules
2. 0:50 Calculating the taxable supplies percentage
3. 2:09 De minimis tests explained
4. 4:02 Machine X Limited worked example
5. 6:15 Anover Limited standard test application
6. 10:15 Annual adjustment and year-end reconciliation

About this lesson

This video walks you through the key tests—simplified de minimis and standard—that determine how much VAT you can recover, with worked examples showing the calculations you'll need for the Taxation paper. Understanding partial exemption is essential for VAT-registered businesses operating across different supply types, and mastering these tests will help you answer exam questions confidently and accurately. The video starts by explaining the basic principle: if you make taxable supplies, you reclaim all input VAT; if you make exempt supplies, you reclaim none. When you make both, partial exemption rules apply. You'll learn how to identify which input VAT can be reclaimed directly (stock and costs tied to taxable supplies) and which must be apportioned using a formula based on your taxable turnover as a percentage of total turnover. The core of the lesson covers three de minimis tests that simplify the calculation. Simplified test one checks whether your total input VAT is under £625 per month on average and exempt supplies are below 50% of total supplies—if both conditions are met, you reclaim everything. Simplified test two uses a different measure: input VAT minus amounts directly attributable to taxable supplies. If neither simplified test works, you apply the standard test, splitting all input VAT between taxable and exempt categories and checking whether exempt-related VAT exceeds the £625 monthly threshold or 50% of total input VAT. Throughout, worked examples using realistic business scenarios show you exactly how to apply each test, calculate monthly averages, and determine the final VAT recovery amount. The video also covers the annual adjustment mechanism, allowing you to correct over- or under-recovered VAT at year-end if your circumstances change.

Duration: 11m