ACCA Advanced Taxation (ATX) Practice Exam

Is there any input VAT recovery for exempt supplies?

1. Yes, fully allowed

2. No, none allowed

3. Only partial recovery

4. Recovery allowed under certain conditions

The correct answer is: No, none allowed

Input VAT recovery in the context of exempt supplies is a nuanced area of VAT legislation. When an entity makes exempt supplies, it is not able to recover any input VAT that is incurred in relation to those supplies. This principle is rooted in the fundamental operation of value-added tax systems, where the purpose of VAT is to tax consumption rather than to be a cost to businesses. In circumstances where a business is engaged solely in making exempt supplies, it does not create a taxable output against which it can offset any input VAT. Therefore, when a business incurs VAT on purchases or expenses related to its exempt activities, there is no possibility of recovering that input VAT. This completely disallows recovery and underscores the key point that businesses focused on exempt supplies cannot reclaim the VAT they pay on inputs used in making those supplies. While there are considerations such as partial exemption for businesses that deal with both taxable and exempt supplies, in the scenario solely related to exempt supplies, there is no allowance for input VAT recovery. This clear rationale helps ensure that the VAT system operates effectively, preventing distortion in pricing and ensuring fairness among businesses engaged in different types of taxable and exempt operations.