VATVAL03900 - Apportionment of monetary consideration: costs-based apportionments

If the apportionment method cannot be based on selling prices, for example because that does not produce a fair and reasonable apportionment, a cost based method may be appropriate.

In the most straightforward cases it will be possible to identify costs directly attributable to all of the supplies that are being made. The proportion of these costs attributable to supplies of each liability is then calculated and applied to the total selling price. A business can apply this calculation to either its VAT-inclusive or VAT-exclusive selling price. For examples see Notice 700 (HMRC website).

There are several specific points to note:

1) Most businesses will incur some costs that are not readily attributable to any of the supplies being made by them. Such costs could include rental of premises, heating, lighting and telephone bills and staff costs. Where it is not possible to directly attribute “general” costs of this type, they can be treated in one of two ways:

• exclude them from the calculation completely; or
• split them in the same proportions as the costs that are directly attributable. For example, if the directly attributable costs resulted in 20% being attributed to zero-rated supplies and 80% to standard-rated supplies, the “general costs” should be allocated in the same ratio.

Whichever option is selected, the end result will be the same - the end-values being determined solely by the directly attributable costs.

Excluding non attributable costs completely may not be acceptable if the costs are used far more significantly in making supplies of one type than the other. For example, if the business sells both standard rated hot food and zero rated cold food but fuel costs are excluded completely. A fair and reasonable method of attributing the costs will be required if the business wishes to use a cost based method in these circumstances.

2) There may be some cases where it is possible to attribute particular costs, that would not normally be directly attributable, to some of the supplies. For example, an organisation employs a secretary 5 days a week who spends 3 days per week preparing the organisation’s magazine and 2 days arranging meetings and social trips for the members. It would be possible to include 3/5 of her wages as costs attributable to the supply of the magazine and 2/5 as costs attributable to the supply of meetings and trips.

3) Under this method of apportionment there are several things to watch out for in the business’s calculations which accidentally or intentionally could give rise to under-valuations or overvaluations of the respective supplies:

• Check that the costs have been directly attributed to the fullest possible extent. Some costs may have been left in the “pot” of non-attributable costs that should actually have been attributed to one of the supplies.
• Check that all of the supplies being made and all of the costs incurred have been taken into account in the first instance. Complete omission of a supply or of a particular cost can result in a distorted valuation.
• Check that those costs which have been directly attributed to a supply have been attributed to the correct supply.
• Check that the figures are accurate by reference to the business’s accounts or other commercial records.
• Where a particular cost is being attributed on some “unusual” basis, for example staff costs by reference to time spent by the member of staff in producing various supplies, check that the business can support the allocation of value on the chosen basis of attribution.