How much VAT can you reclaim when some sales are VAT-free?
If some of your sales are VAT-free (exempt), you can only reclaim part of the VAT on your costs, unless that part is small enough to ignore (de minimis).
Your answer
Enter the VAT on your shared costs and your sales for the period.
About this calculator
For VAT-registered businesses that make some VAT-free (exempt) sales, using HMRC's standard method.
Use the same period for every figure. Leave out VAT on business entertainment, VAT on non-business activities, and sales of equipment or property you used in the business.
What happens to your answers
We don’t keep them. Your answers go to our server to do the sums and aren’t stored or logged. If you copy a link to your answers, they’re in the link itself, so only share it with people you trust.
How it’s worked out
You reclaim all the VAT on costs used only for taxable sales, and none on costs used only for VAT-free sales. For shared costs (residual input tax), you reclaim the share that matches your taxable sales: taxable sales ÷ all sales, rounded up to the next whole percent.
If the VAT linked to VAT-free sales is no more than £625 a month on average and no more than half of all your VAT, it's small enough to ignore (de minimis) and you reclaim it all. Two simpler tests (Test One and Test Two) can show this without the full sums.
The figure for each VAT Return is provisional. At the end of your VAT year you redo the sums for the whole year (the annual adjustment) and put any difference on the last return of the year or the first one after.
Worked example
You can reclaim £22,700.00 of the £35,000.00 VAT on your costs (partial exemption).
Standard method · figures for one year · blocked and non-business VAT already left out · capital asset sales left out
| VAT on costs only for taxable sales: reclaim it all | £12,500.00 |
|---|---|
| Recovery rate: taxable sales £115,000 ÷ all sales £170,000 = 67.65%, rounded up to 68% | 68% |
| Add 68% of the £15,000.00 VAT on shared costs | + £10,200.00 |
| VAT you can reclaim on the standard method | £22,700.00 |
| VAT linked to VAT-free sales: £7,500.00 on their own costs + £4,800.00 of shared costs | £12,300.00 |
| Main de minimis test: £1,025.00 a month (limit £625) and 35.14% of all your VAT (limit 50%) | Failed |
| Simplified tests: all VAT £2,916.67 a month (Test One) or £1,875.00 without taxable costs (Test Two), limit £625; VAT-free sales 32.35% of sales (limit 50%) | Failed |
| VAT you can reclaim for the year | £22,700.00 |
Based on HMRC's partial exemption rules (VAT Notice 706): the standard method and the de minimis tests.
Questions people ask
What's the difference between 0% and VAT-free (exempt) sales?
0% (zero-rated) sales are taxable, so the VAT on their costs can be reclaimed. Exempt sales, such as rent on homes, insurance and most financial services, are outside VAT, so the VAT on their costs usually can't.
What is the annual adjustment?
At the end of your VAT year you work out the recovery rate and the de minimis tests again for the whole year. The difference from what you claimed on each return goes on the last return of the year, or the first one after.
Can I use last year's recovery rate?
Yes, if you did an annual adjustment last year, you can use last year's rate on each return this year and settle up at the annual adjustment.
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