A VAT registered business falls within the scope of partial exemption when it has supplies of both a taxable and an exempt nature. Output VAT cannot be charged on an exempt supply and equally any input VAT incurred directly in making the exempt supply, generally, cannot be recovered.
Registered VAT taxpayers with both taxable and exempt supplies, the amount of input VAT claimable as input tax is restricted to the extent of value of the taxable supplies. The taxpayers are expected to use the partial exemption formula when determining the deductible VAT input for each tax period.
Source RSM
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