If you’re a healthcare provider that makes both exempt supplies (medical care from registered professionals) and taxable ones (purely cosmetic procedures, medico-legal reports, retail or catering), you’re what HMRC calls “partly exempt”.
HMRC’s rule is simple. You recover VAT on costs used to make taxable supplies, but you don’t recover it on costs used to make exempt ones, and VAT on shared costs is split using a partial exemption method (VAT Notice 706).
It’s tempting to treat that as the accountant’s calculation, i.e. doing it on the return. The calculation is indeed theirs, but it runs on a decision made months earlier, every time a cost enters the books. And that decision is yours.
Three piles, sorted one invoice at a time
Under Notice 706 every cost carrying VAT lands in one of three piles:
- Directly attributable to taxable supplies: recovered in full
- Directly attributable to exempt supplies: not recovered
- Residual, meaning used for both, such as rent, IT and administration: apportioned
Only the third pile needs a partial exemption method to split it. By default that is the standard method, which recovers residual VAT in proportion to taxable turnover as a share of total turnover, unless HMRC has approved a special method for your business.
Which pile a cost belongs in is a question about what it was bought for, and the person who knows the answer is whoever booked it. The clinic manager ordering consumables for a cosmetic list knows they’re for taxable work. The practice ordering a dermatology report for a patient’s treatment knows it’s exempt.
Needless to say, six months later, an accountant looking at a supplier name and an amount knows neither.
Why can’t the accountant fix it at year-end?
The simple answer is because the attribution isn’t in the ledger to be found. The steps are run for each VAT return, then trued up in an annual adjustment at the end of the partial exemption year, so a cost booked without a taxable-or-exempt tag is wrong on the quarterly return before it’s wrong on the annual one.
Reconstructing it later means someone deciding, from memory, which supplier costs related to which service line, and the recovery figure is then a best guess.
It also decides something bigger than the percentage. If your exempt input tax stays within HMRC's de minimis limits (no more than £625 a month on average and no more than half your total input tax, with both conditions met) you can recover all of it. HMRC offers two simplified tests based on turnover that can confirm this in-year, but the full test and the year-end annual adjustment still rest on each cost having been attributed. In this sense, untagged spending doesn't just muddy the split, it can cost you a full recovery you were otherwise entitled to.
Coding VAT at the point of capture
The practical rule is to decide the pile at the point of capture. When an invoice is booked or an expense is submitted, the person raising it tags it taxable, exempt or shared, and that tag travels with the transaction into the export. It’s one extra field, answered by the person best placed to answer it, as soon as they know the answer.
This is where Moss comes in. Across accounts payable, purchasing and expenses, each transaction is captured with its VAT fields structured and complete (rate, amount, supplier VAT number, tax point) and coded to the right treatment as it enters, then exported in that form.
Moss doesn’t run the partial exemption calculation, doesn’t decide between the standard and a special method, and doesn’t file your return. Those stay with your accountant or tax adviser. What it does do is make their inputs trustworthy.
Data hygiene is always a systems job that you fix upstream, and the calculation is professional judgement that belongs with an adviser. The trouble comes when you ask the adviser to fix a data problem created at capture, at year-end.
A split that already exists when you need it
With Moss, when your accountant asks for the taxable-and-exempt split, it already exists. Every transaction is attributed as it was captured and exported with its VAT fields intact. The partial exemption calculation, and the de minimis check, run on the record rather than on someone’s reconstruction, and the recovery figure can be evidenced line by line if HMRC ever asks.
