ACCA Advanced Taxation (ATX) Practice Exam

Which limits are assessed for recovering VAT relating to exempt supplies?

1. £400 per month and 30% of all input tax

2. £625 per month and 40% of all input tax

3. £625 per month and 50% of all input tax

4. £800 per month and 60% of all input tax

The correct answer is: £625 per month and 50% of all input tax

The correct answer reflects the implications of the UK VAT system regarding input tax recovery for businesses that make exempt supplies. When a business deals with exempt supplies, it faces limitations on its ability to reclaim VAT on purchases associated with those supplies. This is because the input tax related to exempt supplies does not contribute to taxable business activities. The limits state that a business can recover a fixed amount of input tax, specifically £625 per month, while being capped at 50% of the total input tax related to purchases. The reasoning behind these figures is that they are designed to balance the need for businesses to manage their input VAT recovery without providing an unwarranted advantage to those making primarily exempt supplies. Higher recovery limits may incentivize businesses to make exempt supplies, potentially distorting market competition and reducing VAT revenues for the government. Therefore, the figures: £625 per month and recovery at a rate of 50% of input tax reflect a controlled approach aimed at balancing these interests within the VAT framework.