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.
Transactions with entitlement to VAT refund
Let’s consider an example:
A company has annual transactions as follows:
VAT payable to tax office
VAT lost due to sales with limited exemption
However, any VAT not reclaimable via the normal VAT system will be considered a cost for corporation tax purposes.