VAT News

Need to agree a Partial Exemption Special Method – HMRC new submission route


If you are sat wondering what a Partial Exemption Special Method (PESM) is and why you’d want one, then perhaps some background would help.

As a VAT registered organisation – whether a corporate, public sector or not for profit one – you need to be able to work out how much VAT you can recover on your costs. This will get slightly more complicated to work out if your income streams include VAT Exempt areas and additionally more so if you have Non-Business income in the mix, but for the purposes of this update we’ll keep to a situation where you generate just Exempt and Taxable income activities. This complication is because VAT on costs that relate wholly or in part to generating VAT Exempt income will be blocked from recovery if they exceed some prescribed values which we refer to as “de minimis” limits.

We refer to the way in which you work out how much VAT you can recover as a Partial Exemption Method (PEM).  It is really important to look at not just the mechanics of the PEM you use to allocate VAT costs to income areas but also the complexity of the generation of the information your PEM uses and the time to calculate the PEM. Time is after all money, as the old phrase goes.

Recognising that Partial Exemption can be a complex area HMRC have a relatively straightforward Partial Exemption method known as the “Standard” method. This effectively calculates VAT recovery on overhead costs based on taxable income relative as a percentage of total income generated.  You can read up on all the nuances in the Standard Partial Exemption method in Public Notice 706.

If there is this simple Standard Method for a PEM that HMRC are comfortable for you to use and do not require you to even, ask for permission prior to using it - why would anyone wish to deviate from that route? The answer is equally as simple.

The Standard PEM may not and, in larger organisations (Banks, Universities, Housing Associations, Private Health Providers, Insurance businesses etc) involved in a mix of Taxable and Exempt income generation, will not be the most accurate route to identifying the VAT you should be able to recover on your costs.

  • It may be that it takes “more” costs to generate the Exempt income than it does to generate the Taxable income.
  • In a building where you are paying VAT on the lease, the areas occupied by people working on the Exempt income generation may be greater than the areas occupied by those working on the Taxable income generation – this area metric might more accurately reflect the use of the VAT cost than a turnover split.

The result of such variable factors means that you need a Partial Exemption Special Method (PESM). This simply means you want a method that isn’t limited to the constraints set in the Standard Method, tied to Turnover as the apportionment mechanism. At Centurion we spend a fair amount of time helping clients of all types and sizes, navigate their way to a new PESM. Firstly, you need to work out the basis of a new methodology, check that it does produce a “fair and reasonable” result, but you also have to obtain HMRC’s agreement on the use of that PESM before you can adopt it in your organisation.

Often there will be negotiations with HMRC on the PESM and even before Covid, this could take many months. The access, announced on the 16 August, to a new online application for a PESM is therefore to be welcomed - Apply for a Partial Exemption Special Method - GOV.UK (

It hasn’t reduced the amount of information and work anyone will need to undertake to devise and submit an application for a new PESM but hopefully it will ease some aspects of the delays in agreeing a new PESM as HMRC state that:

“We will contact you within 30 days to tell you:

  • we accept your proposal
  • we need more information to make a decision
  • if your proposal is not suitable, the reasons why”

This is an online process to be welcomed, if your organisation has been operating, its current PESM for more than 3-4 years and especially has been challenged by the impact that Covid has had on the existing PESM you’ve used then now could be the point to make sure your PESM is fit for purpose for the future. If that sounds like you then get in touch with the Centurion VAT team either via or by calling 0330 124 7740. Partial Exemption, just one of the areas where VAT does get complicated, and Centurion can help.


For the avoidance of doubt, the content recorded in this news article does not constitute formal advice and we do not guarantee the accuracy of any information provided at the time of reading. It is always recommended that you seek professional advice before acting on any of the news articles or information included.


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