VATVAL03700 - Apportionment of monetary consideration: methods of apportionment - general
Section 19(4) of the VATA 1994, although providing for apportionment of a consideration, does not stipulate that this has to be done by any particular method. There is, however, a requirement that the values attributed to the various supplies are “properly attributable”. In essence, this means that the values have to be fair and supported on a logical, calculated basis. There are a number of general principles to note:
1) Businesses must first consider whether there is a single or multiple supply.
Apportionment is required where a single consideration is received in connection with multiple supplies, where different VAT rates apply.There is also potential for apportionment in circumstances where there is only a single supply if this would result in extending the application of a zero rate beyond its intended purpose see VATVAL03300.
2) It is the business’s responsibility to propose a method of apportionment in the first instance. We have no power to insist that any particular method must be used.
3) There are two basic apportionment methods that, with appropriate adaptations, have been found useful in a large number of circumstances. One is based on the normal selling prices and the other uses the costs attributable to the different supplies being made. For examples see Notice 700 (HMRC website).
Businesses are not obliged to use any of these methods and apportionment proposals based on some other method should not be rejected out of hand.
You may have to insist upon the use of a particular method if the business refuses to make an apportionment calculation or declines to change a method that produces an unfair result. Where possible, you should then use one of the publicised example methods because these are derived from methods that VAT Tribunals have approved in the past. If you employ an alternative method you will need to explain why the example methods were considered inappropriate in the event of the matter proceeding to a Tribunal.
You should remember that whereas some methods of performing an apportionment can be of general application, specific values arrived at under apportionments cannot. You will often encounter businesses alleging that, for example, a consideration should be split as to 40% exempt and 60% standard-rated because those were the percentages arrived at in a particular Tribunal decision or because business X, who is in the same line of business, has agreed those percentages with HMRC. The end values arrived at following an apportionment result from the application of an apportionment method to each business’s particular circumstances. It is very likely that applying the same method to different businesses will produce different results. This can be demonstrated by a simple example using a costs-based method.
Example
Businesses A and B are both non-profit making social clubs. Both charge £20 per year subscription and both provide their members with a monthly magazine, club tee shirt, badge and use of club premises. Both use a simple costs based method of apportionment under which the £20 subscription is divided in the same ratio as the costs that can be directly attributed to the membership benefits. In each case, the magazine qualifies for zero-rating whereas the other supplies are standard-rated. Business A produces its magazines, tee shirts and badges in-house, the costs being £1,000, £2,500 and £500 respectively. Business B buys in its magazines, tee shirts and badges, the costs being £2,000, £6,000 and £2,000 respectively. In business A’s case, the ratio of the zero rated to standard rated costs is 1:3 - with the result that £5 of the subscription can be zero-rated and £15 standard-rated. In business B’s case, however, the same ratio of the costs is 1:4 - with the result that £4 of the subscription will be zero-rated and £16 standard-rated.
This illustrates how the application of an identical method for similar businesses can produce different results, as the circumstances for each business will be different and each will have its own balance of costs. Business should not attempt to rely on apportionments agreed for any other businesses, no matter how similar their activities may be.
Guidelines for Compliance
Guidelines for Compliance aim to provide greater clarity and transparency and offer HMRC’s view on approaches which increase or lower the tax compliance risk.
A link to this Guidelines for Compliance is included here: VAT Apportionment of Consideration (ref GfC2/2023)
This does not replace or supersede existing guidance but is intended to supplement it.
These guidelines on apportionment of consideration are for businesses who make multiple supplies of any goods, services, or both, by bundling them into ‘packages’ of more than one VAT liability sold for a single price. They have been developed to help businesses apportion the VAT due on those bundles.
They:
- outline HMRC’s recommended approach for how the consideration (amount paid) is apportioned when goods or services with different VAT liabilities are supplied together for a single price
- help businesses to lower tax compliance risk, referred to as ‘risk’ throughout the guidelines, by highlighting approaches that reduce the risk of error and HMRC assessments