PE23500 - Partial Exemption principles: Fiscal neutrality and PE

Fiscal neutrality is a key feature of the VAT system. »Ê¹ÚÌåÓýapp VAT system must not distort competition between suppliers within the UK.

Fiscal Neutrality and Partial Exemption

For partial exemption (PE), fiscal neutrality means that a taxable person can deduct all the input tax incurred and used in making recoverable supplies and no more.

So when a taxable person who is partly exempt enters the chain of transactions, the tax burden consists of

  • any output tax charged on supplies

plus

  • the irrecoverable input tax

»Ê¹ÚÌåÓýapp VAT incurred on costs used in making exempt supplies cannot be deducted as input tax. So the taxable person who is partly exempt becomes a final consumer and is burdened with the non-recoverable input tax.