HM Revenue & Customs have simplified the de minimis rules with effect for VAT periods commencing on or after 1 April 2010.  The new rules aim to reduce the administrative burden on businesses.  The changes are optional and can be used without HM Revenue & Customs’ approval.  The two changes are:

1. Simplified tests
2. Annual test

At present a business looks at how much input tax it has incurred on costs relating to exempt supplies under the partial exemption method in the period. Provided the de minimis test is met i.e. the input tax relating to exempt supplies is not more than £625 per month on average and not more than 50 per cent of its total input tax, then that input tax can be recovered.  At the year end a further calculation is carried out to identify whether an annual adjustment is required.

Simplified tests

Businesses must pass either of the two following tests in the period in order to be treated as de minimis:

Test 1:  Total input tax incurred is no more than £625 per month on average and the value of exempt supplies is not more than 50 per cent of the value of all supplies.

Test 2: Total input tax incurred less input tax directly attributable to taxable supplies is no more than £625 per month on average and the value of exempt supplies is not more than 50 per cent of the value of all supplies.

If either of the tests are met, a partial exemption calculation is not required.  A year end calculation is still required to identify whether an annual adjustment is required.

Annual test

The new annual test gives the option of applying the de minimis test once a year provided the business meets the conditions below:

1. Pass the de minimis test for its previous partial exemption year;
2. Apply the annual test throughout any given partial exemption year; and
3. Have reasonable grounds for not expecting to have more than £1million input tax in the current partial exemption year.

The de minimis status must be reviewed at the end of the year and any adjustment required made.

Please contact tax@menzies.co.uk, or complete our enquiry form by clicking here.