Vat Pro-rata

Anglo-Spanish Chartered Accountants

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VAT Pro-rata

Sometimes, a business may not be able to reclaim all of the input VAT suffered during the course of the business activities. Generally speaking and for the purposes of clarification:


VAT exempt transactions

When a business makes a supply (supplies of goods or services), the transaction may be:

  • Subject to VAT
  • Exempt from VAT with a whole exemption
  • Exempt from VAT with a limited exemption


Whole exemptions

These sales when made by the company are not subject to VAT by virtue of the transactions type. For example:

  • Export of goods
  • Sales of goods within the EU

The company will not charge VAT on the supply, however, any VAT suffered when acquiring such goods resold is reclaimable via the normal VAT system. This is because the sale is subject to VAT but due to the circumstances of the supply the VAT is not charged at the point of sale, but delegated to the point of enjoyment (the country of destination).


Limited exemptions

These sales are those which due to the nature of the goods or services being supplied are not subject to VAT as per current legislation.

The company will not charge VAT because it is simply not allowed to as the transaction itself is subject to VAT but exempt.

Consequently, any VAT suffered in enabling the supply of such goods or services are not reclaimable via the normal VAT system.


Pro-rata of input VAT

When a business supplies goods or services both subject to VAT in the normal way and those with a limited exemption, then the amount of input VAT that can be reclaimed will be limited in proportion to normal VAT sales.

This is because the business is making supplies with and without entitlements to reclaim VAT.

The percentage which will be reclaimable will be calculated in relation to the sales.


Percentage reclaimable = Transactions with entitlement to VAT refund x 100
                                                      Total transactions


Let’s consider an example:

A company has annual transactions as follows:

Subject to VAT
With limited exemptions
Sales 110,000 100,000 10,000
Output VAT on sales 16,000 16,000 0
Input VAT on purchases 12,000 12,000 0
% VAT reclaimable 83.33    
VAT reclaimable 10,000    
VAT payable to tax office 4,000    
VAT lost due to sales with limited exemption 2,000


However, any VAT not reclaimable via the normal VAT system will be considered a cost for corporation tax purposes.

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