What is required to meet the criteria for Test 1 of the partial exemption tests?

To meet the criteria for Test 1 of the partial exemption tests, the requirements focus on the relationship between total input tax and the percentage of exempt supplies. The correct option highlights that the total input tax must not exceed a specific threshold (£625 per month) and that exempt supplies cannot exceed 50% of all supplies.

This test is crucial for businesses that make both exempt and taxable supplies, as it helps determine the portion of input tax that can be reclaimed. The threshold for total input tax serves as a limit designed to identify businesses whose taxable supplies form a significant portion of their overall business profile, thereby simplifying the recovery of input tax.

By establishing these limits, the test ensures that only businesses with a low level of exempt supplies and a moderate level of input tax can benefit from simpler recovery methods, helping to resource and manage tax compliance efficiently. Higher thresholds or different percentages would change the dynamics of the test significantly, reflecting different levels of complexity in tax recovery, which is not the case here.

This is why the outlined conditions in the correct answer effectively align with the specific requirements of Test 1 for partial exemption.