What must a partially exempt trader do with input VAT associated with exempt supplies?

A partially exempt trader has specific rules to follow regarding input VAT related to exempt supplies. Since they are not fully exempt or fully taxable, they have to evaluate how much input VAT they can reclaim based on the relationship between their taxable and exempt supplies.

Reclaiming input VAT is limited for partially exempt traders because they make both taxable and exempt supplies. Option C indicates that they can reclaim input VAT only if it meets the de minimis tests, which are thresholds that determine when a portion of input VAT can be reclaimed based on certain conditions set by tax legislation. This could include thresholds related to the total amount of exempt supplies or the overall proportion of exempt activities compared to taxable activities.

This approach ensures that the trader is only reclaiming input VAT proportionate to their taxable business activities, which complies with VAT regulations. If their exempt supplies exceed a certain threshold, they may not be able to reclaim any input VAT connected to those exempt supplies, ensuring fairness in the VAT system.

In contrast, other choices do not accurately reflect the rules governing partially exempt traders regarding input VAT and exempt supplies. The correct understanding is essential for compliance with tax regulations and ensuring correct VAT accounting practices.