Client has property business with some properties that are VATABLE (opted to Tax) and some are exempt (no option in place).
Some years client can be fully taxable (within de minimis limits) and some years they are partly exempt - this depends on levels of expenditure each year on fees, repairs etc.
During the current VAT Year (annual accounting) there was a large insurance claim for damage at one of the exempt properties. Client quite rightly told the insurance company that they could not normally recover the input tax as the property was exempt. Insurance company agreed to reimburse all costs including the VAT suffered.
Client has paid contractors to repair damage and has recovered full amounts paid (including VAT) from the insurance company.
Hope I have explained that clearly but now to the partial exemption calculations:-
A) Does the client include the VAT paid to the contractors in the exempt input tax for partial exemption calculations and bring in the insurance receipts gross (i.e. no output tax on these) or
B) Exclude both the expenses and recoveries (which cancel each other out) from th calculations?
It could be the case that if the input tax is included in the partial exemption calculations and the client then passes the de minimis tests then all this input tax is recoverable and the client will benefit from the VAT included in the insurance claims from the insurance company.
I am sure that the VAT received from insurance company does not get included in Output Tax - if this was the case and the client did not pass the de minimis tests and the input tax was blocked then they would lose out.
Any guidance would be much appreciated before I phone the VAT helpline.