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HMRC internal manual

VAT Valuation Manual

HM Revenue & Customs
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Apportionment of monetary consideration: methods of apportionment - general

Section 19(4) of the VATA 1994, although providing for apportionment of a consideration, does not stipulate that this has to be done by any particular method. There is, however, a requirement that the values attributed to the various supplies are “properly attributable”. In essence, this means that the values have to be fair and supported on a logical, calculated basis. There are a number of general principles to note:

  1. It is the trader’s responsibility to propose a method of apportionment in the first instance. We have no power to insist that any particular method must be used.
  2. There are two basic apportionment methods that, with appropriate adaptations, have been found useful in a large number of circumstances. One of these uses the costs attributable to the different supplies being made; the other is based upon the customary selling prices. For examples see Notice 700 (HMRC website).

Traders are not obliged to use any of these methods and apportionment proposals based on some other method should not be rejected out of hand.

You may have to insist upon the use of a particular method if the trader refuses to make an apportionment calculation or declines to change a method that produces an unfair result. Where possible, you should then use one of the publicised example methods because these are derived from methods that VAT Tribunals have approved in the past. If you employ some alternative method you will need to explain why the example methods were considered inappropriate in the event of the matter proceeding to a Tribunal.

You should remember that whereas some methods of performing an apportionment can be of general application, specific values arrived at under apportionments cannot. You will often encounter traders alleging that, for example, a consideration should be split as to 40% exempt and 60% standard-rated because those were the percentages arrived at in a particular Tribunal decision or because trader X, who is in the same line of business, has agreed those percentages with his own VAT Office. The end values arrived at following an apportionment are the products of the application of an apportionment method to each trader’s particular circumstances. It is very likely that applying the same method will produce a different end result. This can be demonstrated by a simple example using a costs-based method.

Traders A and B are both social clubs. Both charge £20 per year subscription and both provide their members with a monthly magazine, club tee shirt, badge and use of club premises. Both use a simple costs based method of apportionment under which the £20 subscription is divided in the same ratio as the costs that can be directly attributed to the membership benefits. In each case, the magazine qualifies for zero-rating whereas the other supplies are standard-rated. Trader A produces its magazines, tee shirts and badges in-house, the costs being £1,000, £2,500 and £500 respectively. Trader B buys in its magazines, tee shirts and badges, the costs being £2,000, £6,000 and £2,000 respectively. In trader A’s case, the ratio of the zero rated to standard rated costs is 1:3 - with the result that £5 of the subscription can be zero-rated and £15 standard-rated. In trader B’s case, however, the same ratio of the costs is 1:4 - with the result that £4 of the subscription will be zero-rated and £16 standard-rated.

This illustrates how the application of a set figure for all traders of one category would fail to arrive at a “proper attribution” of value in the cases of many individual traders within that category. The greater the number of traders within the category, the greater the incidence of inappropriate values being applied to their supplies.