Free guide
Partial exemption without the spreadsheet
How modern accounting practice can handle one of UK VAT's most error-prone calculations without breaking the digital link to the ledger.
Last reviewed: 23 June 2026
What's inside
- 1
Why partial exemption is so painful — and which UK businesses are actually affected
- 2
The standard practitioner workflow on Xero, QBO, Sage, and FreeAgent — and why HMRC tolerates it
- 3
The annual adjustment trap and how errors compound silently
- 4
How OneSixth handles partial exemption alongside the major accounting platforms
- 5
Three ways to engage if you want to take a closer look
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Common questions
What is partial exemption and who does it affect?
A business is partially exempt when it makes both taxable and exempt supplies and incurs VAT on costs serving both. It catches more businesses than expected — residential lettings, some financial services, education, healthcare or insurance alongside taxable income. You can only recover the input VAT relating to taxable supplies.
How does the standard method work?
VAT directly attributable to taxable supplies is recovered in full, VAT attributable to exempt supplies isn't, and residual (overhead) VAT is apportioned by the ratio of taxable to total supplies — applied provisionally each quarter and trued up with an annual adjustment.
What is the de minimis limit?
If exempt input VAT is below the de minimis limit you can recover it all. The test: exempt input tax averaging no more than £625 a month and no more than 50% of total input tax.
Can the major cloud platforms do partial exemption?
None automate the standard-method calculation or annual adjustment; practitioners run a spreadsheet and post a manual Box 4 restriction, which HMRC tolerates provided workings are kept. OneSixth performs the calculation alongside the ledger.
What is the annual adjustment?
At year-end you recalculate the recovery percentage across the whole year and adjust the quarterly returns to match. Because the year-end rests on quarterly workpapers that are months stale, small quarterly errors compound.