VBNB31000 - VAT Business and Non-Business: Principles: Methods of Apportionment

Section 24(5) of VAT Act 1994 directs a business to apportion tax to reflect use in its business and non-business activities but it does not specify any method to use, therefore any method which results in a fair and reasonable apportionment of the tax may be used.

When making an apportionment you should keep in mind:

• the various activities of the business; and
• the use of the costs incurred.

In practice there is likely to be a range of acceptable methods of apportionment. However, HMRC may challenge a method if it is not considered to achieve a fair and reasonable result.

It may be that a single basis of apportionment of mixed-use input VAT does not achieve a fair and reasonable result. Instead you may need to use a range of apportionments of different groups of costs. This may be a similar process to establishing cost pools or sectors for partial exemption.

A business may make both taxable and exempt supplies and have to make an apportionment between business and non-business use. Unless it has written approval from HMRC the business must carry out the business/non-business apportionment process before, and quite separately from, any partial exemption calculations. See PE30500

The calculations must not be combined, if the business wishes to apply the partial exemption de minimis limit and/or the Capital Goods Scheme. For more on the Capital Goods Scheme, including what to do if the business has a combined method, see PE Partial Exemption PE67000.

There is no de minimis limit for non-business input VAT, it is irrecoverable subject to VBNB30200 below.

Please note the partial exemption de minimis limit does not apply if a business has a combined method. The business must restrict any input tax recovery suggested by the calculation. This is so even if the result of a combined method calculation falls below the de minimis limit that would apply if the business had a separate partial exemption method.