💡 The Problem
If your business makes both taxable and exempt supplies, you cannot recover all input VAT. You need a method to determine how much of your input VAT relates to taxable supplies (recoverable) versus exempt supplies (blocked).
Three-Step Process
Step 1: Direct Attribution
Allocate input VAT directly to taxable or exempt supplies where a clear link exists. Example: advertising for a taxable product = fully recoverable. Brokerage fee for an exempt financial service = fully blocked.
Step 2: Residual Input VAT
Overhead costs that cannot be directly attributed (rent, utilities, IT) are "residual." Apply apportionment formula: Recovery % = Taxable Revenue ÷ Total Revenue × 100
Step 3: Annual Adjustment
At year-end, recalculate actual recovery percentage using full-year figures. Adjust any over- or under-recovery in the final return period. Use annual wash-up to true up interim provisional percentages.
Who's Affected?
🏦 Banks & financial institutions
🛡️ Insurance companies
🏠 Property companies with residential rent
🏥 Healthcare providers