Is it input tax: methods of apportionment under VAT Act 1994 section 24(5)
In many cases a business will not propose a detailed method of apportionment. Instead it might propose an apportionment in round percentage terms. This figure may be based on a sample period, for example a single telephone quarter in the case of domestic/business phones. It may alternatively be based upon an apportionment provided for direct tax purposes.
The law does not prevent this. It may give a fair and reasonable result in cases where:
- the amount of tax at stake is not high; and
- the amount of private use does not change much.
Where private use varies greatly such an approach cannot be said to give a consistently fair and reasonable result. A method that adjusts the apportionment to reflect changes in private use should be in place.
There are many possible methods of apportionment. All are potentially acceptable as long as they adequately reflect changes in use. In the case of business/domestic apportionments it is HMRC policy to try and ensure that the burden on business is minimal. Simple methods are generally to be chosen over complex ones. Possible methods include logs of actual use (for a plane or yacht); records of time spent and so on.
Agreement of apportionment method
Businesses do not have to get HMRC’s agreement for apportionment methods although some will ask for it. Agreement will only be given if the business does not make exempt supplies.
HMRC will usually agree a method if we are satisfied that the proposed apportionment gives a fair and reasonable result. We will try to ensure that any agreement is on the basis that:
- in the future the method continues to give a fair and reasonable result and;
- the business will monitor major changes in their circumstances and amend the method when necessary.
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.
Where apportionment under an agreement made before 1 January 2011 between business and non-business use is needed by a business that makes both taxable and exempt supplies 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.
What to do if an apportionment is unfair
As the law does not specify methods of apportionment HMRC cannot challenge a method as such. We can only challenge the result it gives. If a business proposes a method that we agree gives a fair result currently but which we believe is likely to give an inaccurate result in the future we cannot challenge the method immediately. Instead we will tell the business about our concerns now. We will challenge the misleading result in the future.
If we disagree with an apportionment method we will normally bring it to the attention of the business. We will ask the business to alter it or justify it. If the business refuses we may substitute our own judgement. We may then assess on the basis of our judgement.
If a business asks for a retrospective change of a previously agreed method of apportionment it will need to show that:
- the former method did not produce a fair and reasonable result (in other words it was not itself an acceptable method); and
- the proposed method does achieve this objective.
HMRC will normally approve the change provided these criteria are met. We will normally turn down the request if either of the criteria is not met. See Victoria and Albert Museum Trustees (VIT62540).