HMRC internal manual

VAT Fuel and Power

Scope of the reduced rate: apportionment of supplies partly for qualifying use: how to determine what proportion of fuel is for qualifying use

There is no prescribed method of apportionment. Any method that produces a fair and reasonable result is acceptable.

For example, if part of the premises is used exclusively for qualifying use and the rest is used exclusively for non-qualifying use, apportionment by reference to floor space might be reasonable. But if the part of the premises that is used for qualifying use is fully heated and the part that is used for non-qualifying use is only partly heated, it is likely that the part used for qualifying use will use proportionately more fuel.

As a simplification measure, the whole supply is treated as though it were for qualifying use if at least 60% of the fuel is for qualifying use.

If less than 60% of the fuel is for qualifying use, the supply must be apportioned accordingly: the fuel supplied for qualifying use is reduced-rated, with the fuel supplied for non-qualifying use being standard-rated. The apportionment is a mandatory requirement under the law (VAT Act 1994 Schedule 7A Group 1 Note 4), meaning that traders are under a legal obligation to make an apportionment. If you are satisfied that a trader’s premises is used partly for a qualifying use, but are not satisfied with the apportionment method they propose, you should negotiate a figure that seems more reasonable with the trader. You cannot insist that the trader charge the standard - rate of VAT on the whole supply, merely because you do not immediately agree with the proposed apportionment method.

Business customers may recover VAT incurred on fuel purchased for use in their business, subject to the normal rules. This applies even where a supply is deemed to be for domestic use or is treated as being for qualifying use. VAT can only be recovered to the extent that the fuel is to be used for a business purpose. Guidance on how to treat VAT incurred on purchases for mixed use can be found in V1-13: Input Tax.