WEEKLEY TOP TIPS – DEEKS VAT

Partial Exemption De Minimis Limits 

One of my favourite stories about the partial exemption de minimis limits involves a hairdresser I advised several years ago. She owned the freehold of her property, which consisted of a ground-floor shop where she ran her business and a first-floor flat that she rented out on a buy-to-let basis. Since the rental income from the flat was exempt from VAT, she faced some challenges regarding input tax recovery. 

The hairdresser was planning major improvements to the flat, with costs amounting to £50,000 plus VAT. She asked if there was a way for her to reclaim the input tax on these expenses. My response was simple yet strategic: “Only if you spread the work over two partial exemption tax years.” 

Here’s why this approach made all the difference: 

• For businesses with both exempt and taxable income, all input tax can be claimed on costs if the exempt input tax qualifies as de minimis. 
• There are two de minimis tests, the key test is that exempt input tax must be less than £7,500 in a partial exemption tax year and also account for less than 50% of the total input tax incurred by the business. 
• Exempt input tax includes the portion of input tax not claimed on mixed costs and general overheads, such as telephone and computer expenses. 

A partial exemption tax year typically ends on 31 March, 30 April, or 31 May—depending on the business’s VAT periods—or on 31 March if the business files monthly returns. In my client’s case, by spreading the building work over two tax years at £25,000 plus £5,000 VAT per year, she cleverly took advantage of the £7,500 tax de minimis threshold. 

This simple strategy allowed her to maximize her input tax recovery while staying compliant with VAT regulations. It’s a great reminder that timing and planning can make a significant difference in managing VAT obligations effectively. 

Louis Good

VAT Specialist

louis@deeksvat.co.uk