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What is an annual adjustment?

A business will normally be required to undertake a partial exemption calculation each VAT return period in order to provisionally determine the amount of recoverable input tax incurred during that period (see, for example, the discussion of provisional recovery in the Partial exemption ― standard method guidance note).

At the end of the tax year (or other longer period), a business is required to redo the partial exemption calculation using the figures for the whole tax year / longer period in order to calculate the actual amount of recoverable input tax for the whole period. Where there is a difference