Business Brief 35/2014 reasserts HMRC’s position that floor-space Partial Exemption Special Methods (PESM) are not normally appropriate for retail businesses. This follows the Revenue’s defeat in the Lok’nStore Group PLC decisions in the FTT and UT in which the taxpayer argued for a floor space allocation of 99.98% input tax recovery on its supplies of taxable self-storage facilities in purpose-built stores, and exempt insurance for stored goods.

The FTT found in favour of the taxpayer, relying on the “cost component of the price” test set out in AB SKF2 it concluded that the general overheads on the price of the insurance “must be very small” and that the storage area of the buildings was used “almost exclusively” for taxable storage. Accordingly, it accepted the PESM was fair and better reflected use than the standard method.

On appeal, the UT rejected HMRC’s appeal but recognised that the issues in such cases are highly fact specific. HMRC’s position remains that where VAT bearing costs are used only to a slight extent in the making of exempt supplies, it will agree that a method which results in almost full recovery is appropriate. However, HMRC does not agree that a cost can only be a cost component of an output supply if the price of that output is set by reference to the cost.

To read the Business Brief click here.