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Partial exemption and the right to deduct: the cost component issue

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An important emerging VAT issue concerns the treatment of subsidies not linked to the price by partly exempt businesses. HMRC has recently suggested that such subsidies will lead to a restriction of the right to deduct input tax, even if they do not fund any discernible non-business or exempt output activity. However, such a restriction is not permitted under EC law and case law (see, in particular, Commission v France). Nor is it provided for anywhere in the UK implementing provisions governing partial exemption.

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