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HMRC internal manual

VAT Business/Non-Business Manual

Apportionment of tax: why is apportionment of tax needed?

This section of the manual gives guidance on what to do when a business pays tax on goods or services that it intends to use for both:

  • business activities; and
  • non-business activities such as charitable activities.

Guidance on what to do when a business pays tax on costs that are put to mixed business/private use can be found in VIT VAT Input Tax VIT25000.

A business is unlikely to be able to treat all the tax it incurs as input tax if it undertakes both business and non-business activities. Any tax which relates:

  • to goods or services obtained solely for the purposes of the business activity is input tax; and
  • solely to the non-business activity is not input tax.

Tax on goods and services that relates to both activities must be apportioned to identify the part that is input tax. An example of this would be tax paid on overhead costs.

Section 24 of the Value Added Tax Act 1994 implies that businesses should directly attribute as much tax as possible to business and non-business activities. This should always be done. A business/non-business apportionment is not an alternative to direct attribution.

After direct attribution there may be a block of costs which cannot be directly attributed to either category. The tax on this non-attributable expenditure has to be apportioned.

Under VAT Act 1994 Section 24(5) the business has to apportion tax so that only tax which relates to their business purposes is treated as input tax.

This is a different apportionment from that carried out under the partial exemption rules to work out what percentage of input tax can be recovered. Where a business:

  • has non-business activities for which it has not agreed a method of apportionment with HMRC; and
  • is partly exempt

any apportionment should be done before the partial exemption calculation is made.


  • a business makes both taxable and exempt supplies; and
  • apportionment between business and non-business use is needed under an agreement made before 1 January 2011

the apportionment process must be carried out before any partial exemption calculations. This is because the non-business element is non-business VAT and would have a distorting effect on the partial exemption calculations.

However, from 1 January 2011, if a business makes exempt supplies any new method must be a business/non-business and partial exemption method. See PE Partial Exemption for more on combined business/non-business and partial exemption methods.

A business should not combine a business/non-business and partial exemption calculation unless it has written approval for such a method from HMRC See PE Partial Exemption PE30000 and VBNB31000 for more on this.