Partial exemption from GST input tax

​​How partial exemption works

If your business is registered for GST, you are allowed to claim back the GST you have incurred on goods and services.

However, you can only claim back GST on those that are directly related to the supplies that you make to your customers that are taxable. You can't claim input tax on the cost of supplying goods or services that are exempt from GST, such as:

• financial services
• insurance
• postal services
• medical supplies made by registered professionals or institutions
• supplies by charities

If your business supplies any of these goods or services, you may be partially exempt for GST purposes.

For example, if you were to sell a fridge and also provided payment options and insurance for it, you could claim input tax on the cost of supplying the fridge but could not on the insurance or loan.

When you work out your input tax on your GST return, you will need to make sure you don't claim back the GST you pay on supplying exempt goods or services.

The two tests for partial exemption

There are two tests you should apply to your sales to determine whether you are partially exempt.

Test A

You pass test A if the value of the exempt supplies of goods or services you have made in the past 12 months does not exceed 5% of your total sales either:

• at the end of any GST return period, or
• in the first 12 months in which you are registered for GST

If you pass test A, you can deduct all the input tax you have paid on your GST return.

If you fail test A, you must apply test B.

If you fail test A because of your projection

If, when you first register for GST, your business projections indicate that you would expect to pass test A in your first three years, but you subsequently fail the test, then we may ask you to make adjustments.

If you fail test A because, in the first year you register for GST, you have reasonable grounds to expect the value of your exempt sales in any one of your first three GST years will be more than 5% of the total of all the supplies you will make, you must carry out an adjustment covering the whole of your first three GST years. This adjustment should be carried out on the GST return following the end of your third GST year, and:

• if the adjustment shows a lower amount of input tax that could be deducted for the previous year, add the difference between input tax deducted and input tax now deductible to the output tax on this GST return; or
• if the adjustment shows that you are entitled to an additional amount of deductible input tax, add this amount to the input tax on the GST return

If you fail test A because of goods purchased

If you fail test A because you've purchased goods or services during the year that you sell or intend to sell to a 'connected person' that is itself not entitled to deduct in full all of the input tax it incurs, you are only entitled to deduct as input tax that proportion of the GST that the connected person is itself entitled to deduct.

This applies even if there are intermediaries between you and the connected person.

'Connected persons' is defined in Article 3 of the GST law 2007.

Goods and Services Tax (Jersey) Law 2007 on Jersey Law website

If, for each GST period or GST year, you pass test A you can deduct all your input tax in full and do not need to carry out the calculations below.

When is my first GST year?

Your first GST year runs from the date you register for GST to the end of the first GST return more than 12 months later.

For example, if you registered from 6 May 2010, and your first GST return was for the period to 30 June 2010, your first GST year ran from 6 May 2010 to 30 June 2011.

Each subsequent GST year runs for 12 months, so your following GST year ran from 1 July 2011 to 30 June 2012.

If you wish to use different years, for example to fit in with a financial year end, you must apply to the Comptroller of Income Tax for approval.

Test B: the partial exemption method

You can only apply test B if you fail test A.

If your total turnover is less than £10 million a year

If your business has a total turnover (including taxable and exempt supplies) of less than £10 million a year you can carry out the calculations below on an annual basis, for each GST year after your first.

You should calculate step 3 using the figures for the whole of your GST year to work out the taxable proportion of your input tax. This proportion is used provisionally for each GST return period of the following GST year, and an adjustment made at the end of the year using the actual figures for the year.

If your total turnover is £10 million a year or more

If your total turnover is £10m a year or more you must carry out the calculations below for each GST return period.

Apply steps 1-4 before applying test B. Then apply step 5

Step 1

This step applies to the GST you pay on making taxable supplies only.

• add up the GST you've paid only on purchases and expenses that you have used (or will use) to supply taxable goods or services
• this amount is the input tax you deduct in your GST return

Step 2

This step applies to the GST you pay on making exempt supplies only.

• add up the GST you've paid only on purchases and expenses that you have used (or will use) to supply goods or services that are exempt from GST
• this input tax is exempt and cannot be deducted in your GST return, unless you pass test B (after carrying out the calculations below)

Step 3

This step applies to the GST you pay on making both taxable and exempt supplies together.

• identify the GST you've paid on purchases and expenses that you use to supply both taxable and exempt goods or services
• this 'residual' input tax must be split according to the proportion that is used to make taxable supplies and the proportion that is used to make exempt supplies

For each GST period, this is the formula you must use to work out the proportion of GST you've paid to make taxable supplies:

(Value of taxable supplies / value of all supplies) x 100 = deductible % (rounded to the nearest whole number)

Calculated % x amount of residual input tax = proportion to be added to your taxable input tax

Supplies of goods and services outside Jersey

'Taxable supplies' include any supplies you make outside Jersey that would be taxable supplies if they had been made in Jersey.

When you work out step 3, you should include taxable supplies, plus the value of any supplies you make outside Jersey that would be exempt supplies if they had been made in Jersey.

Step 4

If you import goods or receive services listed in Schedule 3 to the GST Law 2007 and you use them to make exempt supplies or both taxable and exempt supplies together, you must also carry out this step.

For each importation of goods or Schedule 3 services you receive during a GST period, if you have used that supply to you to make:

• taxable supplies only - you don't need to take any further action

• exempt supplies only - multiply the value of the imported goods or Schedule 3 services received by the standard rate of GST (5%) and deduct the resulting figure from your taxable input tax. If the figure you have calculated is more than your taxable input tax, add it to your output tax

• taxable and exempt supplies together – multiply the value of the imported goods or Schedule 3 services received by the standard rate of GST (5%). Multiply this GST amount by the deductible % you have calculated at step 3. Take the value you have now calculated away from the first GST value calculated here. The result is your exempt input tax. Deduct the resulting figure from your taxable input tax. If the figure you have calculated is more than your taxable input tax, add it to your output tax

Schedule 3 of Goods and Services Tax (Jersey) Law 2007 on Jersey Law website

Test B

Having a carried out steps 1-4, you should now apply this test to see whether you can deduct all the input tax you have paid.

If the total amount of input tax that is attributed to exempt supplies through step 2 and step 3 does not exceed both £250 a month on average and 25% of all your input tax, you may deduct all the input tax you have paid, except where:

• in the first GST year in which you are registered for GST you have reasonable grounds to expect that the value of the exempt sales you make in any of the two years following the first GST year will exceed 5% of the total of all the supplies you will make; or

• you have purchased goods or services during the year that you sell or intend to sell to a 'connected person' that is itself not entitled to deduct in full all of the input tax it incurs

If you fail this test because of either of the points above, you must carry out an annual adjustment using the total figures used for each quarterly GST return. You must do this on the first GST return following the last GST period of your GST year. For example, if your GST year ends on 30 June, and you make quarterly GST returns, the annual adjustment is made on the return for the period to 30 September.

Step 5

The amount you calculate in each GST period is provisional and your deduction of input tax is ‘fixed’ by the annual adjustment.

• if the adjustment shows a lower amount of input tax that could be deducted for the previous year, add the difference between input tax deducted and input tax now deductible to the output tax on this GST return; or

• if the adjustment shows that you entitled to an additional amount of deductible input tax, add this amount to the input tax on the GST return

Download partial exemption - worked example (size 41kb)

Example

The example below shows how partial exemption would apply to a typical business scenario.

Download GST partial exemption example (size (40kb)

Capital purchases

If you purchase goods or services locally or by importing them, and:

• the value is more than £1,000,000 (excluding GST)

• the sale is not zero-rated or exempt from GST

you must adjust the GST you've paid over a period of five years. This is because of the long-term value of the purchase to the business.

Capital purchases include things like:

• the purchase of a commercial building

• the premium paid when entering into a lease on an office

• refurbishment of an office

• a new swimming pool at a private school

If the purchase is only ever used to make taxable supplies of goods or services, you don't need to make an adjustment.

If the purchase is only ever used to make exempt supplies of goods or services, you can't deduct input tax.

If the purchase is used to make both taxable and exempt supplies of goods or services, or where the use of the item changes from taxable to exempt or exempt to taxable, you will need to make adjustments.

In the GST year that you purchase the goods or services, you should deduct GST using the partial exemption method above.

In each of the following four GST years you'll need to make an adjustment.

The capital purchase adjustment

You must adjust 20% of the GST at the end of each GST year, using deductible proportion of residual input tax calculated under the annual adjustment. The amount that can be deducted is then compared to 20% of the GST deducted in the year of purchase. Where more input GST can now be claimed, this should be added to input tax for the GST return on which the adjustment is made. If less input tax now falls to be deductible, the adjustment amount should be subtracted from input tax on this GST return.

If the goods or services you've purchased are disposed of or destroyed, no adjustments are due for years after that.

Using a different method for calculating partial exemption

You can apply to use an alternative method. If you do so you must have written approval from us to use an alternative method before you start to use it.