HMRC have launched a new online service for VAT registered businesses to apply for a Partial Exemption Special Method (PESM). This is accompanied by an updated checklist of information that should be provided with applications.


  • Where a business makes both taxable and exempt supplies for VAT purposes, it is termed ‘Partially exempt’.
  • Partially exempt businesses can only recover input VAT to the extent it relates to taxable supplies made.
    • Some input VAT can be directly attributed to either taxable or exempt supplies.
    • Residual input VAT, for example that on many overheads, cannot be directly attributed. This must be apportioned based on a standard method of calculation.
  • Rather than using a default apportionment method, businesses can apply to HMRC to use a bespoke PESM to apportion residual input VAT. In many cases, this may give a fairer and more reasonable result.

In March 2021, HMRC outlined an Accelerated e-mail process to request temporary alterations to partial exemption methods to reflect changes in business practices due to Coronavirus. The same e-mail address can be used to submit PESM approval requests. 

New online service

As an alternative to e-mail, HMRC’s newly launched online service can be used to apply for a PESM. HMRC must be provided with:

  • A proposal document.
  • A worked example of the proposal.
  • The latest annual adjustment calculation.
  • A declaration. 
  • Any additional documents necessary.

HMRC should make contact within 30 days of the application with a decision or request for further information.  

PESM checklist

HMRC have updated Appendix 2 of VAT Notice 706. This provides detailed guidance for businesses seeking approval for a PESM.

A number of ‘basic’ and ‘additional’ details must be provided to HMRC. These cover 20 bullet points, including items such as:

  • An explanation of why the current method is no longer suitable or the proposed new method is better.
  • The VAT liabilities of the business’s main supplies and their Place of supply.
  • Details of any assets covered by the Capital Goods Scheme.
  • Details of any assets subject to existing Lennartz accounting arrangements.

A further 43 items of required information are also listed in Appendix 2, which should accompany PESM applications where they are relevant.

  • The number of these items which will apply to a given business will depend on its individual circumstances.
  • VAT groups and the use of sectorised methods, for example, create additional complexity.

Useful guides on this topic

Partial exemption & input VAT
How do you calculate the amount of input tax you can recover under the VAT partial exemption rules? What are the de minimis rules?

Capital Goods Scheme
What is the VAT Capital Goods Scheme (CGS)? When do I use it? How does it work?

Private use of goods: VAT and Lennartz
What is the Lennartz mechanism? How does the Lennartz mechanism assist businesses in accounting for the VAT effect of the non-business use of goods? 

R & C Brief 4: Partially exempt VAT registered businesses affected by Coronavirus
Revenue & Customs Brief 4 (2021): 'Partially exempt VAT registered businesses affected by Coronavirus (COVID-19)' outlines an accelerated process to request temporary alterations to partial exemption methods to reflect changes in business practices due to Coronavirus. 

External links

HMRC: Apply for a Partial Exemption Special Method

HMRC: Partial Exemption (VAT Notice 706): Appendix 2

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