ACCA Advanced Taxation (ATX) Practice Exam

When analyzing the input VAT for partial exemption, what is one of the necessary tests performed?

1. Input tax must exceed taxable supplies

2. Total input tax must be assessed for all supplies

3. Input tax must be less than £625 per month

4. Exempt supplies must be over 60%

The correct answer is: Input tax must be less than £625 per month

In the context of partial exemption for VAT, determining the input VAT that can be reclaimed is based on several necessary tests. One critical aspect involves understanding the thresholds set by HMRC for claiming input tax. When a business makes both taxable and exempt supplies, it becomes partially exempt and must apply specific rules to determine how much input VAT can be recovered. One notable test is related to the de minimis threshold, which indicates that if the businesses' recovered input tax is below a certain limit—in this case, £625 per month—the business can reclaim all the input tax on their purchases and not have to perform a more complex apportionment process. Thus, the requirement that input tax must be less than £625 per month offers clarity and prevents the burden of complex calculations for businesses whose exempt supplies do not significantly impact their overall VAT position. This alleviates unnecessary complexities and reduces administrative costs for the business, ultimately creating a more efficient tax recovery process. In contrast, the other options do not reflect the necessary criteria for assessing partial exemption correctly. For instance, having input tax exceed taxable supplies or exempt supplies be over a specific percentage does not directly relate to the immediate and necessary tests performed under the partial exemption rules. Instead, it pertains to broader considerations of the