ACCA Advanced Taxation (ATX) Practice Exam

What happens if both simplified tests are failed for VAT partial exemption?

1. No refund is available

2. The full partial exemption calculation must be done

3. Only certain input VAT can be recovered

4. Partial exemption becomes invalid

The correct answer is: The full partial exemption calculation must be done

If both simplified tests for VAT partial exemption are failed, the full partial exemption calculation must be performed. This is because the simplified tests are designed to provide a quicker way of determining whether a business can reclaim VAT in regard to exempt and taxable supplies. Failing both tests indicates that the business does not meet the criteria for easy calculations and therefore must revert to the more complex approach to accurately assess their entitlement to recover input VAT. The full calculation involves determining the input VAT that can be reclaimed based on the specific use of goods and services in relation to taxable activities. This calculation typically requires a detailed analysis of the proportion of exempt and taxable supplies made by the business over a given period. Through this approach, a more accurate picture of the business's entitlement to reclaim input tax is obtained, leading to compliance with VAT regulations. It is essential for ensuring that the business correctly calculates the recoverable VAT, which is crucial for maintaining cash flow and adhering to tax obligations.