ACCA Advanced Taxation (ATX) Practice Exam

According to the partial exemption rules, if total input VAT regarding exempt supplies does not exceed the de minimis limit, what can happen?

1. It can still be recovered

2. It must be paid immediately to HMRC

3. It is lost and cannot be claimed

4. It can be deferred until future years

The correct answer is: It can still be recovered

When considering the partial exemption rules in VAT, the de minimis limit refers to a threshold set for input VAT that relates to exempt supplies. If the total input VAT associated with exempt supplies does not exceed this de minimis limit, it indicates that the impact of the input VAT on the overall VAT reclaim is minimal. In this context, the correct outcome is that the input VAT can still be recovered. This principle is based on the intention to simplify the VAT accounting for businesses making exempt supplies, thereby allowing the VAT incurred on costs related to these supplies to be recovered up to a certain minor threshold. If the input VAT on exempt supplies is below the de minimis level, businesses can claim it back, recognizing that it doesn't significantly distort their VAT position and minimizes compliance burdens. Under the rules, if the input VAT exceeds the de minimis threshold, different treatment applies, which may require different calculations or partial recovery methods. Choices suggesting that the VAT must be paid immediately, is lost, or can be deferred do not align with the rationale behind the de minimis provisions, which aim to allow reclaim of minor amounts to aid in efficient cash flow management for businesses engaged in both taxable and exempt activities.