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HMRC internal manual

VAT Business/Non-Business Manual

Apportionment of tax: agreeing an apportionment method

Businesses do not have to get HMRC’s agreement for apportionment methods although some will ask for it.

However, many businesses do ask for agreement HMRC will consider all such requests and consider whether:

  1. The result is fair and reasonable because the indicator of non-business activity on which the method is based gives a fair reflection of the balance between business and non-business activities.
  2. The indicator on which the method is based will reflect changes in the extent of the business and non-business activities.
  3. The method can be easily applied by the business and monitored by HMRC or is overcomplicated and prone to error.

Agreement will normally be given if HMRC is satisfied that the method is soundly based. Agreement will only be given if the business does not make exempt supplies. 

The method will be agreed on the basis of the current levels of business and non-business activities. The method may no longer give an accurate apportionment if these levels change to a large extent.

A business should keep its method under review. It should notify HMRC if there are significant changes in the nature or levels of business/non-business activities.

When agreeing methods, especially complex ones, HMRC will send a letter to the business indicating the basis on which we accept the method.

For example, if it is based on income it will be because at the time the agreement is made income provides an accurate indicator of non-business activity. It will be made clear in the agreement letter that the method will need to change if this is no longer the case.

If the method is complex HMRC will record its understanding of what is meant by the various terms and categories used in the method. Over time both HMRC staff and the representatives of the business who agreed the method are liable to change. It is important their successors have an understanding of how those who agreed the method thought it would work.

Any agreement on apportionment should be noted on HMRC’s records. We will check that the agreed method has been carried out. We will also check that it still represents a fair and reasonable reflection of the business and non-business use of the relevant supplies.

A method for businesses with regular non-business activity should normally incorporate an annual adjustment calculation. However, if a cost is incurred totally for non-business purposes the recovery of VAT on that cost cannot subsequently be adjusted using an annual adjustment. That tax remains fully irrecoverable.