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Value added tax (VAT)Section BVATPartial Exemption

ACCA · Question 18 · Value added tax (VAT)

Section B: Case 1 - QuantumLeap VR Ltd

Scenario: QuantumLeap VR Ltd is a virtual reality software developer. The company began trading on 1 January 2023. Its taxable turnover was £6,000 per month for the first 10 months. In November 2023, it secured a major contract, and taxable turnover jumped to £30,000 for November and £30,000 for December.

Question: QuantumLeap VR Ltd occasionally provides exempt financial software services. For the quarter ended 31 March 2024, its total input VAT was £10,000. Of this, £8,000 directly related to taxable supplies, £1,500 directly related to exempt supplies, and £500 was residual. The percentage of taxable supplies to total supplies is 80%.

Under the partial exemption rules, how much input VAT can the company recover for this quarter?

Answer options:

A.

£8,400

B.

£8,000

C.

£10,000

D.

£9,500

How to approach this question

Calculate the total exempt input VAT. This is the direct exempt input VAT plus the exempt portion of the residual input VAT. Compare this total to the de minimis limits: £625 per month on average (£1,875 per quarter) AND less than 50% of total input VAT. If it is below both, all input VAT is recoverable.

Full Answer

C.£10,000✓ Correct
First, calculate the exempt input VAT. Direct exempt = £1,500. Exempt portion of residual = 20% x £500 = £100. Total exempt input VAT = £1,600. Next, check the de minimis test. The limit is £1,875 per quarter AND no more than 50% of total input VAT (£10,000 x 50% = £5,000). Since £1,600 is less than £1,875 and less than £5,000, the de minimis test is passed. Therefore, the exempt input VAT can be recovered in full, meaning all £10,000 is recoverable.

Common mistakes

Forgetting to apply the de minimis test and simply disallowing the exempt input VAT.
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