Apportionment of tax: methods of apportionment
The law does not ask a business to apportion tax incurred in any set way. Any method may be used if it results in a fair and reasonable apportionment of the tax. When making an apportionment you should keep in mind:
- the various activities of the business; and
- the purposes for which the cost is incurred.
Section 24(5) of VAT Act 1994 says a business should apportion tax to reflect its business and non-business purposes. Defining the purpose of an item of expenditure can be a subjective question. It is one on which different people may take different views.
In practice there is likely to be a range of acceptable apportionment figures. HMRC staff will normally only challenge an apportionment if it is completely outside what they think this range is.
It may be that a single apportionment of all overhead tax does not achieve a fair and reasonable result. Instead you may need to use a range of apportionments of different items of overhead costs.
Where non-business use is regarded as insignificant HMRC may use its discretion to allow a waiver of apportionment. There is no statutory de minimis level in terms of a monetary or percentage figure. It is a matter of judgement whether the benefit in terms of revenue is outweighed by:
- the administration cost to the business: and
- the cost to the Department in checking that an apportionment has been carried out.
If HMRC decides to allow a waiver of apportionment HMRC will write to the business and tell it that the arrangement applies only for as long as the existing low level of non-business use is kept up. If the extent of non-business use goes up to a significant level the business will need to make an apportionment.
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 apportionment process before, and quite separately from, any partial exemption calculations. See PE Partial Exemption PE30000
The calculations must not be combined. This would prevent the business from correctly applying the partial exemption de minimis limit and 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.
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 has a separate partial exemption method.