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HMRC internal manual

VAT Valuation Manual

Apportionment of monetary consideration: costs-based apportionments where the costs of only one supply can be identified

You are most likely to encounter difficulties with costs-based apportionments in cases where it is only possible to directly attribute costs to one of the supplies involved. The problem is accentuated when the supply to which a direct attribution of costs is not possible is nevertheless a significant element of the outputs.

In this situation the most practical solution is to apply a “mark-up” to the costs that have been directly attributed, deduct this figure from the total selling price, and treat the remainder as the value of the other supply. This method of apportionment was approved by a VAT Tribunal in the case of Ithel Covenay Thomas [(1985) VATTR67]:

The Appellant operated a greyhound stadium. Members of the public paid a single sum that covered admission (standard-rated) and the provision of a programme (zero-rated). Because it was not possible to directly attribute any costs to the supply of admission, the Tribunal approved a method that proceeded from the costs directly attributable to the programmes, which were identifiable. The costs of the programmes actually supplied were calculated. This sum was then uplifted to “allow for a compilation charge to the Appellant” - this total being the value of the zero-rated supply. The value of the standard-rated admission was then arrived at by deduction of that figure from the total consideration.

You should note especially that this method specifically excluded from the programme costs the costs of programmes that had been produced but not sold to the public. This is because we are trying to establish the value of the supplies that have actually been made. If the total production costs of all the programmes had been used in the calculation, then the value of this supply would have been overstated. This should be borne in mind particularly when looking at the value of supplies to a membership in return for subscriptions - remember, for example, to exclude the costs of producing magazines that are not actually supplied to members.

Although the Thomas case gave a method for performing an apportionment when only one supply’s costs can be identified, it gives rise to a further difficulty in its application of uplift to the identified costs. That difficulty concerns establishing an appropriate level of “mark-up” and this is likely to be a contentious issue in some cases.

Please note that as a result of the European Court of Justice and subsequent House of Lords ruling in CPP, the supply of admission along with a programme of events would usually be seen as a single supply (see Town & Country Factors (LON/02/322)). A position strengthened by the Finance Act 2011, amendment to the VATA 1994 Schedule 8 Group 3 Note 2. However, as all cases are treated on there own merits you have to apply all the tests to each transaction. (See VATSC80000 for more information on single/multiple supplies). 

In Thomas, the Tribunal applied an uplift of 50% on the printing costs but did not explain the reasoning by which it had arrived at that figure. The only other case in which the question has so far been considered was that of Barbara Holt Bright (LON/88/1383X and LON/88/1393X). This case is sometimes called Nexus because that was the trading name used by the Appellant.

Nexus was a “dating agency”. Callers who responded to advertisements placed in the press, if “approved” after submitting a membership application, received a membership card, handbook, monthly bulletin and a magazine called “Ice-breakers”. Nexus also disseminated tapes that members used to circulate information about themselves to each other. Access to various social activities could only be obtained by displaying one’s membership card.

At the first hearing, Customs had argued that the supplies should be valued by reference to market values. Nexus contended that the proper basis was by reference to the cost of preparing and circulating the printed material as compared to the total cost of running the business. The Tribunal had no evidence before it from Customs as to how an apportionment could be performed other than by costs, which we claimed was a distortive method because it undervalued the standard-rated supplies. Therefore it found that apportionment was to be performed by reference to the cost of supplying the services.

The second Nexus hearing concerned the practicalities of performing the apportionment. Having found that there were three supplies; zero-rated printed matter, standard-rated tapes and general membership facilities, the Tribunal’s starting-point was the total costs attributable to the printed matter. It then uplifted the figure by 100%. The uplifted figure was then calculated as a percentage of the total costs for that year (having excluded depreciation from the latter amount) and VAT calculated on the resultant amount when applying the same percentages to the consideration for the supplies.

As in the Thomas case, the Tribunal gave no full explanation of why it considered a 100% uplift to be the appropriate amount. It did mention that account had been taken of compilation and delivery costs, which in this case were substantially greater than in Thomas. However, there is no reasoning in either decision that relates the 50% and 100% to the scale of compiling the respective supplies. We are therefore in difficulty in cases where we are disputing the level of uplift with a trader - what basis do we have to support the uplift that we are arguing should apply? In particular, are we looking for an uplift that covers only costs actually incurred or are we to apply an uplift that takes account of an element of profit? This is discussed in detail in VATVAL04100.

Points to note

The Thomas and Nexus “methods” are similar in that they both proceed from establishing the costs of one supply and applying an uplift to it. Neither method is appropriate when it is possible to identify and attribute all costs incurred in making the supplies.

As we have seen, the Tribunals have not provided any clear guidelines on how the amount of uplift is to be determined. In the two cases considered above, the amounts were 50% and 100% - a starting-point could be to consider figures somewhere within that range. It must be emphasised, however, that there is no legal requirement to use a figure within that range - nor is it Customs’ policy to impose such a range of “accepted” uplifts. The uplift applied must be acceptable in the light of each trader’s individual circumstances.

There are four general points that may assist you in this area:

  1. Traders are free to seek any profit level that they wish upon the various supplies that they made. However, if widely discrepant levels of profit are being claimed for the different supplies, then the trader should be asked to provide a full explanation for the difference of treatment. The “weighting” of value in favour of supplies of favourable liability is a fairly common means by which VAT can be manipulated.
  2. The overall profits being generated by a business may be an indication of what would be a suitable uplift.
  3. Where a trader makes other supplies that have the same liability as the supply in relation to which the costs are being uplifted, the level of profit on those supplies may give you an indication of a suitable uplift.
  4. The trader may be part of a particular trade within which the profit levels generally fall within a range that constitutes a “norm”. Remember, however, that because you are concerned with an individual trader you may have to take into account specific factors, e.g. degree of competition locally, that could explain departure from that established norm.

Under the “Thomas method” the uplifted cost figure (of one supply) is deducted directly from the consideration for the supplies. The balance remaining is the part of the consideration attributable to the other supply.

Under the “Nexus method” there is an extra stage in the calculation. The uplifted cost figure is expressed as a percentage of the total costs (excluding depreciation). The percentages so derived are then applied to the consideration received for the two supplies.

An example of both methods has been included at VATVAL04000.

In both Thomas and Nexus, the supply for which cost attribution was possible was zero-rated. The same principles can be applied whatever the liability of the supply for which cost attribution is possible.

Remember - both methods are only to be used where it is only possible to directly attribute costs to one of the supplies involved. They are not appropriate where costs can be identified for all the supplies in question.