Sep 21, 2025
Partial Exemption Explained: How Mixed Businesses Handle VAT Reclaims
Making Sense of Partial Exemption VAT Rules
VAT seems simple until your business sells both taxable and exempt goods or services. That’s when “partial exemption” rules apply. This article explains what it means, how it works in practice, and why expert advice is crucial to avoid overpaying tax or facing HMRC penalties.
What is Partial Exemption?
Normally:
If you sell taxable goods/services (standard, reduced, or zero-rated), you can reclaim VAT on your costs.
If you only sell exempt goods/services (like financial services, health or education), you cannot reclaim VAT.
The challenge: some businesses sell both taxable and exempt services. That’s when partial exemption applies.
Examples of Mixed Supplies
A private school: exempt tuition fees, but taxable uniforms or books.
A healthcare business: exempt medical care, but taxable cosmetic treatments.
A charity: exempt fundraising, but taxable trading activities.
How Partial Exemption Works in Practice
Direct costs → Easy split.
Costs only for taxable supplies (e.g. stock for resale) → VAT reclaimable.
Costs only for exempt supplies (e.g. hospital equipment for exempt care) → VAT not reclaimable.
Shared costs → The grey area.
Rent, utilities, IT, staff – these benefit both taxable and exempt sides of the business.
You can only reclaim a proportion of VAT on these.
Example Calculation (Simplified)
Taxable sales: £60,000
Exempt sales: £40,000
Shared VAT costs: £10,000
Split = 60% taxable.
👉 You can reclaim 60% of £10,000 = £6,000.
The De Minimis Rule
HMRC eases the rules if your exempt side is very small:
If exempt input VAT is under £625/month (or £7,500/year), and
It’s less than 50% of your total input VAT,
…then you can reclaim all VAT in full.
Why It Matters
Misunderstanding partial exemption leads to:
Overclaiming VAT → HMRC fines, interest, reputational damage.
Underclaiming VAT → losing thousands in tax relief you’re entitled to.
Accurate calculation requires judgement and detailed record-keeping.
At Wexley & Associates, we guide businesses through partial exemption so they maximise VAT recovery while staying fully compliant.
Get Expert Support on Partial Exemption VAT
Unsure whether your business is reclaiming the right amount of VAT? Contact Wexley & Associates today. We’ll review your position, protect you from HMRC penalties, and ensure you aren’t leaving money on the table.
