Is it input tax: subsidised activities
An activity can be either business or non-business but not both.
Non-business income, for example some grant income, can be used to support business activities. This does not mean that the supported business activities become partly non-business and partly business. Using non-business income simply makes them subsidised business activities.
If non-business income subsidises exempt supplies it can have an effect on the partial exemption calculation. It could reduce the value of the exempt supply, undervalue the business activity and distort the input tax recovery.
HMRC will normally discuss with a business the extent to which the value of the subsidy should be factored into the partial exemption method as part of the ‘proxy’ for the true value of the exempt supply.
See PE Partial Exemption for more about partial exemption.
Business income can be used to support non-business activities. This does not mean that the supported non-business activities become partly business and partly non-business. The source of funding does not alter the fact that the activities are non-business.