• Date

    06 Dec 2021
  • Category

    Advisory

Minimising the cost of irrecoverable VAT

Most charitable organisations have activities that are classified as being ‘exempt’ or ‘non-business’ for VAT purposes. As such, most are unable to recover all of the VAT they incur on expenditure. This results in irrecoverable VAT costs, and an obligation to perform regular VAT recovery calculations.

The recovery of VAT should reflect the use of the expenditure incurred. If the expenditure is wholly linked to standard rated activities, the associated VAT should be recoverable in full. Where the expenditure is wholly linked to exempt activities, the associated VAT will probably be blocked in full. The recovery of VAT incurred on expenses that are linked to a number of different activities (with differing VAT liabilities) must be restricted to take account of exempt activities.

When it comes to VAT recovery calculations, there are two options – the standard method and special methods. The standard method, the default position, is based on income. If an income-based calculation does not reflect the use of the expenditure, a special method should be considered. Before using a special method, HMRC needs to be satisfied that the special method produces a more accurate reflection of the use of expenditure, and they must formally approve its use.

Whatever method is used, override procedures can be applied when the calculation does not produce a result that reflects the use of expenditure. These procedures can be applied by the taxpayer when the recovery of VAT is too low, and by HMRC if the recovery is too high.

VAT recovery calculations must be performed and reviewed on a regular basis. The recovery must be averaged at the end of every VAT year by performing an annual adjustment. This is normally undertaken between June and August, depending on the VAT return period of an organisation.

Whilst the calculation of recoverable VAT must follow specific rules, the following points are worth noting. In some cases, they could improve the recovery of VAT, or reduce the cost of irrecoverable VAT.

Download issue two of our 'Revive, Refocus, Rebuild – The journey back to better' guide here to find out more…

Would you like to know more?

If you have any queries regarding what we cover in our guide, please get in touch with your usual contact or email charities@azets.co.uk

About the author

Scott Craig Photo

Scott Craig

Partner and Head of VAT Edinburgh
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