ACCA Advanced Taxation (ATX) Practice Exam

Which scenario would allow for the recovery of input VAT related to exempt supplies?

1. Exceeding the set limits

2. Staying within de minimis limits

3. No restrictions on recovery

4. Always recoverable despite the nature of supplies

The correct answer is: Staying within de minimis limits

In the context of VAT recovery, input VAT related to exempt supplies generally cannot be reclaimed. However, there are specific rules in place regarding the thresholds for making such recoveries. When a business stays within the de minimis limits, it means that the level of exempt supplies is low enough that it permits the recovery of a portion of input VAT related to those supplies. The de minimis rule allows the business to reclaim input VAT if the value of exempt supplies is below a certain percentage of their total supplies, typically set around 5% in many jurisdictions. This scenario essentially provides a safeguard for businesses that occasionally make exempt supplies while engaging predominantly in taxable activities. As such, the correct response accounts for the regulatory provisions that permit recovery of input VAT when the business's exempt activities are minor. In contrast, exceeding the set limits would typically indicate a larger proportion of exempt supplies, thereby leading to restrictions on the reclaiming of input VAT. Having no restrictions on recovery or suggesting that input VAT is always recoverable, regardless of the nature of supplies, is incorrect, as these options imply a misunderstanding of VAT recovery rules. The nuanced approach to VAT recovery for businesses making both taxable and exempt supplies illustrates the need for careful compliance with the regulatory framework.