PE48510 | Consideration of Partial Exemption special methods: unsatisfactory methods: background

A partly exempt business must use a ‘method’ to determine the amount of input tax it can recover that relates to its taxable supplies (and certain other supplies that carry the ‘right to deduct’). It has two options

• The standard method - a relatively simple calculation prescribed by law.

• A special method (PESM) - a bespoke method proposed by the business and approved by HMRC. Before April 2005 it was possible for a PESM to have ‘de facto’ approval. See PE44500 - Consideration of PE methods: De facto approval - for more information on de facto approval including the criteria to be met for de facto approval.

• From 1 April 2005 any new PESM must be formally approved in writing.

Any method must be ‘fair and reasonable’. This means it must

• produce a fair recovery of input tax, and

• be reasonable both for the business to operate and for HMRC to check.