Partial exemption de minimis limits

A business that makes both taxable and exempt supplies can recover all of its input tax, including VAT on costs used for exempt supplies, if its exempt input tax is no more than £625 a month on average and no more than half of its total input tax. Since 1 April 2010 two simplified tests and an optional annual test let many businesses confirm this without a full partial exemption calculation. Passing is provisional each return and is checked again for the whole year at the annual adjustment.

What does de minimis mean in partial exemption?

Normally, VAT on costs used to make exempt supplies, such as most property lettings and many financial transactions, cannot be recovered. That is the core of VAT partial exemption. The de minimis rule is a tolerance: where the exempt input tax is small, the law treats it as if it related to taxable supplies, and you recover it in full.

The rule is in regulation 106 of the VAT Regulations 1995, supported by regulations 105A and 106ZA, and HMRC explains it in section 11 of VAT Notice 706. A few boundaries apply from the outset:

• For a VAT group, the limit applies to the group as a whole, not to each member.
• There is no de minimis limit for VAT on non business activities.
• If HMRC has approved a combined business, non business and partial exemption method, you cannot use the de minimis rules at all.
• Blocked input tax, such as VAT on business entertainment, is left out of total input tax.

How does the original £625 and 50% test work?

First work out your exempt input tax. Notice 706 paragraph 11.2 defines it as input tax directly attributable to exempt supplies plus the share of residual input tax (VAT on overheads and costs used for both kinds of supply) that your partial exemption method allocates to exempt supplies. You are de minimis for the period if that total is:

1. not more than £625 per month on average over the period, and
2. not more than half of all your input tax for the period.

Both conditions must be met. Notice 706 paragraph 11.6 gives an example where exempt input tax is below 50% of the total but still not recoverable, because it is above the £625 monthly average. In practice the monetary limit is £1,875 for a quarterly return and £7,500 for a full year.

When applying the test, ignore any amounts due to or from you under the Capital Goods Scheme and any annual adjustment.

What are the simplified tests?

The original test requires a full partial exemption calculation to find the exempt share of residual input tax. The simplified tests in paragraph 11.7 of Notice 706 avoid that step:

Test One

Total input tax is no more than £625 per month on average, and the value of exempt supplies is no more than 50% of the value of all supplies.

Test Two

Total input tax, less input tax directly attributable to taxable supplies, is no more than £625 per month on average, and the value of exempt supplies is no more than 50% of the value of all supplies. This is the test in regulation 105A.

Note that the 50% leg of the simplified tests looks at the value of supplies, not input tax. The value of all supplies includes taxable supplies in the UK, supplies made outside the UK that carry the right to recover VAT, and exempt supplies. Input tax directly attributable to taxable supplies means VAT on costs used only to make taxable supplies, such as goods bought for resale.

You are de minimis if you pass Test One, Test Two or the original test, and once you pass one you need not consider the others. If you fail both simplified tests, the figures you gathered still feed into the full calculation for the original test.

How do the tests work in a real return?

Illustration only. Three businesses file quarterly returns, so the monetary limit for each is £1,875.

• Business A incurs £1,500 of input tax in total and exempt supplies are 20% of its sales. It passes Test One straight away and recovers all £1,500.
• Business B incurs £9,000 of input tax, of which £7,800 is on stock for resale. Exempt supplies are 30% of sales. Total input tax less directly taxable input tax is £1,200, so it passes Test Two and recovers all £9,000.
• Business C also incurs £9,000, but only £4,000 relates directly to taxable supplies. That leaves £5,000, so both simplified tests fail. Its full calculation shows £600 directly attributable to exempt supplies and £4,400 of residual input tax, with a standard method recovery rate of 70%. The exempt share of residual is £1,320, so exempt input tax is £1,920. That is under half of the total but above £1,875, so it fails the original test and recovers £4,000 plus £3,080, a total of £7,080.

Business C shows how a modest amount over the limit costs the whole exempt amount, not just the excess. The test is a cliff edge rather than an allowance.

Why does passing allow full recovery of input tax?

Regulation 106(1) says that where the conditions are met, all input tax in the period is treated as attributable to taxable supplies. Regulation 105A uses the same wording for the simplified test. Because input tax attributable to taxable supplies is deductible under regulation 101, the exempt input tax becomes recoverable just like VAT on your taxable activity. Nothing needs to be repaid for that period provided you remain within the limits when the year is reviewed.

What is the annual de minimis test?

By default you test every VAT period. Regulation 106ZA offers an alternative: a business that was de minimis in its previous partial exemption year can treat itself as de minimis in every return of the current year and recover all its input tax provisionally, without in year partial exemption calculations. To use it you must:

• have passed the de minimis test for your previous longer period
• apply the annual test consistently to every return in the current longer period
• have reasonable grounds for not expecting to incur more than £1 million of input tax in the current longer period

Notice 706 paragraph 11.13 points out the risk: if you fail at the year end, you repay all the exempt input tax recovered during the year in one go. A business expecting its exempt costs to rise sharply should think carefully before relying on the annual test.

How is de minimis status reviewed at the year end?

Every in year result is provisional. At the end of your longer period, normally a tax year ending on 31 March, 30 April or 31 May depending on your return periods (31 March if you file monthly), you carry out the annual adjustment. Notice 706 paragraph 11.5 says this calculation must include all exempt input tax incurred in the year, whether or not it was recovered under the de minimis rule during the year. Regulation 106(2) confirms that de minimis treatment in individual periods is disregarded when testing the longer period.

Apply Test One, then Test Two, to the year as a whole. If you pass, you recover all input tax for the year and need no further partial exemption calculation. If you fail both, do the full calculation and apply the original test to the annual figures. The difference between what you recovered during the year and what the annual figures allow is your annual adjustment, which goes on a return under the timing rules in Notice 706 section 12. Errors found later are dealt with as described in correcting VAT errors.

What mistakes cause problems with de minimis?

• Treating the two limits as alternatives. The £625 average and the 50% limit must both be met.
• Counting blocked VAT, such as entertainment, in total input tax, which flatters the 50% test.
• Forgetting the 50% supplies condition in the simplified tests.
• Skipping the year end review because every quarter passed. A seasonal spike in exempt costs can fail the annual test.
• Overlooking exempt income altogether, for example letting part of a property without an option to tax.
• Assuming de minimis applies under the Flat Rate Scheme. Notice 733 says a partly exempt business on that scheme is treated as fully taxable and makes no partial exemption calculation, but includes exempt income in its flat rate turnover instead.

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Related Accountapedia entries

• The partial exemption annual adjustment
• Zero rated vs exempt supplies
• Irrecoverable VAT in the accounts
• Reverse charge on services bought from abroad
• When to apply for a partial exemption special method

Sources

• GOV.UK: Vat rates
• GOV.UK: Opting to tax land and buildings notice 742a
• GOV.UK: Partial exemption vat notice 706
• legislation.gov.uk: SI 1995/2518, regulation 106
• legislation.gov.uk: SI 1995/2518, regulation 105A
• legislation.gov.uk: SI 1995/2518, regulation 106ZA
• legislation.gov.uk: SI 1995/2518, regulation 101
• GOV.UK: Flat rate scheme for small businesses vat notice 733 2

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.