ACCA Advanced Taxation (ATX) Practice Exam

What is the key factor in determining whether input VAT can be recovered when it relates to exempt supplies?

1. The input VAT must be less than 50% of total revenue

2. The input VAT must be less than the total exempt amount

3. The input VAT must be under specific de minimis limits

4. The input VAT must only relate to exports

The correct answer is: The input VAT must be under specific de minimis limits

In the context of input VAT recovery associated with exempt supplies, the key factor is that the input VAT must fall under specific de minimis limits. The de minimis rules come into play when a business incurs input VAT that relates partially to exempt supplies and partially to taxable supplies. Under certain thresholds, businesses may be allowed to recover a portion of their input VAT even if they are also making exempt supplies. If the input VAT is below the specified de minimis limits, this allows a business to recover that VAT. This is important because it acknowledges the common situation where businesses may engage in both exempt and taxable activities. Hence, if the input VAT is considered de minimis, it signifies that the business is only making a minor amount of exempt supplies in relation to its overall activities, thus facilitating input VAT recovery despite exemptions. The other provided options either do not align with VAT recovery criteria regarding exempt supplies or misinterpret the regulations, like trying to impose arbitrary thresholds not linked to actual input VAT recovery under VAT regulations.