15. Partial exemption
Actions to take if a business is registered for VAT and incurs input tax relating to exempt supplies.
A business is partly exempt if it has incurred tax on purchases that relate to exempt supplies. This is known as exempt input tax. You will have to use a partial exemption method to work out how much input tax you can recover.
Partial exemption (VAT Notice 706) explains partial exemption and methods of calculation.
Partial exemption requirements apply to all VAT traders including those which are insolvent or in receivership or administration.
As office holder you must comply with these requirements in respect of any returns you complete for pre or post relevant VAT periods.
An insolvent business may apply for a change of method to calculate its entitlement to input tax recovery, given the change in circumstances.
We will apply its normal policy, as set out in section 6.2 of Partial exemption (Notice 706), to when any new method can apply form. A new method cannot be applied to any pre-insolvency returns.
When a business is already partly exempt it may seek approval from us to end its current tax year at the relevant date and to make its annual adjustment in the VAT period ending with the relevant date.
You should apply for a Partial Exemption Special Method if you want to recover input tax on goods or services you supply.
If we decide not to approve your change, the annual adjustment should be made in accordance with the normal rules set out in Partial exemption (VAT Notice 706).
Ownership of assets covered by the scheme, known as ‘capital items’, will pass to the office holder on appointment. If there is a change of use whilst under the office holder’s control adjustments may be required.
The office holder will need to establish:
- what assets covered by the CGS are held
- when the assets came into use in the business
- how much input tax was initially incurred and deducted on them
Read Capital Goods Scheme (VAT Notice 706/2) to find out more.
15.3.1 Changes to the Capital Goods Scheme
From 29 July 2026:
- computers and computer equipment are no longer covered by the CGS
- the capital expenditure threshold for land, buildings and civil engineering works has increased from £250,000 to £600,000, excluding VAT — the CGS now only applies to these assets if the capital expenditure is £600,000 or more
The CGS rules for aircraft, ships, boats and other vessels have not changed.
15.3.2 Asset still used within the business
Any adjustments are likely to be modest as they will only address the time of use by the office holder and the difference between their use and that originally made by the business prior to insolvency.
If the office holder brings the company out of insolvency or sells its assets as a transfer of a business as a going concern, ownership of capital items will transfer with it.
15.3.3 Assets no longer used within the business but held for eventual sale
If the original use was taxable and the sale will be exempt then there may be substantial adjustments due. As the sale will be made by and under the direction of the office holder adjustments must be declared by them on returns that they submit.
If the asset is a building then it may be possible to prevent the sale from being exempt by opting to tax (read Opting to tax land and buildings (Notice 742A)), although this may restrict what buyers may be interested.
If the original use of the assets was partly exempt, and if the sale is to be taxable, then adjustments in the office holder’s favour may arise.
If the business cancels their VAT registration without a sale of the asset taking place then an adjustment may arise at that time.
15.4.1 Insolvent business formerly fully taxable or treated as fully taxable continuing to trade
When a business remains fully taxable or continues to be treated as fully taxable, the input tax on the office holder’s fees, and all other overheads, will be recoverable.
When the business carries on trading and becomes partly exempt, it will have to apply a partial exemption method in the normal way. Recovery of input tax, including that on the office holder’s fees, could be subject to restriction in accordance with the partial exemption method used.
15.4.2 Insolvent business formerly partly exempt continuing to trade
When the business remains partly exempt, recovery of input tax, including that on the office holder’s fees, could be subject to restriction in accordance with the partial exemption method in place in the normal way.
You should request a change of method from your local VAT office if, due to changing circumstances, the method in place no longer produces a fair and reasonable attribution of input tax to taxable supplies.
15.4.3 Insolvent business which was fully taxable, or formerly treated as fully taxable, ceases to trade but remains registered pending sale of assets
When the business has ceased to trade, the principal activity will be the sale of assets.
If the assets which are sold are exempt, the business may become partly exempt. Any input tax relating to the sale of the exempt assets would then need to be restricted according to a method. But the office holder’s fees should be treated as an overhead to the business prior to insolvency and, since that was fully taxable, they’re fully recoverable subject to the separation of any third party costs.
15.4.4 Insolvent business, which was partly exempt, ceases to trade, but remains registered pending sales of assets
When the business has ceased to trade, the principal activity will be the sale of assets.
Recovery of input tax is subject to restriction in accordance with the partial exemption method which is in place in the normal way. But the office holder’s fees should be treated as an overhead of the business prior to insolvency and, since that was partly exempt, they will be subject to restriction.
The business should continue to use the method in place in the normal way.
A change of method should be requested from the local VAT office if, in the light of changing circumstances, the method in place no longer produces a fair and reasonable attribution of input tax to taxable supplies.
15.4.5 Insolvent business that have cancelled their VAT registration
VAT is only recoverable on services which, although supplied after the registration was cancelled, relate to former taxable supplies made by the business.