Standard Method Override
The standard method override (SMO) is a calculation that is often overlooked by organisations but should form part of the annual review of VAT recovery. HMRC are now routinely asking for SMO calculations during remote VAT inspections, so it is ever more important that this process is undertaken.
What is it?
The SMO is a calculation that should be completed by partially exempt organisations operating the standard method of partial exemption seeks to deal with situations where the standard method does not provide a fair and reasonable recovery of VAT.
More details about the standard method and the annual adjustment process can be found via our on-demand webinar, ‘Partial exemption for charities’ here.
When does it apply?
The SMO applies where two key stages are met;
- The value of VAT recovered under the standard method of partial exemption is ‘substantially’ different to the recoverable value under a use-based method, and
- The use-based method is fairer and more reasonable in comparison to the standard method.
In order for the difference to be considered ‘substantial’, it will need to exceed either:
- £50,000; or
- 50% of the residual input tax incurred and £25,000
Where either of these thresholds are met, for the override to apply, the use-based method must provide a fairer and more reasonable method of recovery in comparison to the standard method.
Provided this is the case, the override will apply and the use-based method is used in place of the standard method for that particular year.
How can we help?
The Crowe VAT team have found that the standard method of partial exemption does not always provide a fair and reasonable recovery for clients.
This results in many organisations turning to HMRC to request a Partial Exemption Special Method (PESM) which can often be a time consuming and costly process, especially with HMRC’s backlog in processing times.
Essentially, the SMO provides organisations with an opportunity to review whether a use-based method provides them with a fair and reasonable recovery rate (subject to the parameters listed above), without the need for formal approval from HMRC in the form of a PESM request. However, depending on the amount involved and the methodology used, it may be prudent to notify HMRC that the SMO has been used and the alternative method that has been applied.
Consequently, the SMO can be used as an alternative to requesting a PESM, as HMRC’s approval is not formally required to operate the SMO.
For further information, or to discuss whether the SMO applies for your organisation, please contact our VAT team or your usual Crowe contact.
