VAT partial exemption calculator, 2026/27

How this is calculated

Partial exemption applies when a VAT-registered business makes both taxable supplies (which allow input VAT recovery) and exempt supplies (which do not), such as a business with both standard-rated services and exempt land or financial transactions. Input VAT that can be directly linked to taxable supplies is fully recoverable, and VAT directly linked to exempt supplies is not.

The remaining residual input VAT, on overheads used for both types of supply, is apportioned using the standard method: the value of taxable supplies as a percentage of total supplies (taxable plus exempt), applied to the residual VAT figure.

HMRC's de minimis rules mean that even exempt input VAT can be recovered in full if it is small: broadly no more than £625 a month on average and no more than half of your total input VAT for the period, subject to specific tests set out in VAT Notice 706.

Why this matters for landlords and mixed-use businesses

Landlords who opt to tax commercial property alongside holding exempt residential lets, or businesses providing a mix of taxable services and exempt financial or insurance intermediary services, commonly need partial exemption calculations to avoid over- or under-claiming input VAT.

Getting this wrong is a common area of HMRC enquiry, since it directly affects how much VAT a business reclaims each quarter, and an annual adjustment calculation is required at the end of your VAT year to true up the quarterly estimates.

The annual adjustment and alternative methods

Because supply patterns can vary quarter to quarter, HMRC requires an annual adjustment recalculating the recovery percentage using whole-year figures, with any difference from the quarterly estimates corrected on your VAT return covering the end of your partial exemption year.

If the standard method does not fairly reflect how residual costs are actually used, you can apply to HMRC to use a special method instead, for example based on floor space, headcount or transaction counts, which must be agreed in writing before use.

What is the difference between direct attribution and the standard method?

Direct attribution applies where input VAT can be clearly linked to either taxable or exempt supplies, and is either fully recoverable or fully blocked accordingly. The standard method only applies to residual costs that relate to both, apportioned by the ratio of taxable to total supplies.

What is the partial exemption de minimis limit?

Broadly, if your exempt input VAT averages no more than £625 a month and is no more than half of your total input VAT, you can treat all of your input VAT as recoverable, subject to meeting one of HMRC's specific de minimis tests set out in VAT Notice 706.

Do I need to do a partial exemption annual adjustment?

Yes, if you are partially exempt, HMRC requires an annual adjustment after your partial exemption year end, recalculating recovery using whole-year figures and correcting any over- or under-recovery estimated in your quarterly returns.

Can I use a different method than the standard method?

Yes, with HMRC's prior written agreement, you can use a special method that better reflects actual use of costs, such as by floor area, headcount or transaction volumes, instead of the default value-based standard method.