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HMRC internal manual

VAT Valuation Manual

Apportionment of monetary consideration: retrospective apportionment

Whether a trader can be permitted to apply an apportionment retrospectively depends very much on the circumstances of the individual case. The general rule is that any proposed apportionment has to be allowed retrospective effect when a trader is able to demonstrate that it achieves a fair and accurate attribution of values.

However, depending upon the circumstances giving rise to the request for retrospective apportionment, the VAT consequences can differ. Set out below are the situations in which a request for retrospective apportionment is most likely to arise and how they should be treated. (The first two examples assume that past supplies have been wholly standard-rated.)

No apportionment being operated in the past: trader unaware that apportionment was available

If the trader has never been aware of the fact that he is entitled to perform an apportionment, he can make an apportionment in respect of the past for clearly identifiable zero-rated or exempt supplies that have been made. He can claim overpaid VAT under VAT Act 1994 section 80. Any such claim can go back four years from the claim. You will need to examine why no apportionment had been applied in the past to establish whether or not the trader is entitled to any statutory interest.

No apportionment being operated in the past: trader aware that apportionment was available but chose not to apportion

If the trader was aware that he could have performed an apportionment but specifically opted not to do so, he is still entitled to perform an apportionment retrospectively at a later date. This will be the case, even if we had specifically advised him of his entitlement and he chose not to act on that advice. There will not be any entitlement to statutory interest in such cases and you should ensure that the time limits described in the preceding sub-paragraph have been complied with.

Apportionment operated correctly in the past, trader requests retrospective use of a different method

This covers the situation where all the supplies made by the trader that are subject to an apportionment have been identified and given their correct liabilities, an acceptable method of apportionment has been used and the trader has operated the method correctly. The method used may have been agreed with a VAT Office or the trader may have adopted one of those in Notice 700. If the trader then for some reason seeks to adopt a different method with retrospective effect he should be required to show good grounds for doing so.

This is the most problematic scenario. The only requirement under S19(4) of the VATA 1994 is that an apportionment must achieve a “proper attribution” of values. The end-result must therefore be fair and supportable. However, in many cases, it is possible to apply one of several apportionment methods to a given mixture of supplies. Each of these methods is likely to produce a different attribution of values but, just because method A gives a different result from method B, this does not invariably mean that method B is “wrong” or produces an unfair result.

You should therefore examine any proposals to apply a different apportionment method retrospectively in this situation with great care. A trader will have to demonstrate that the new method is more than simply advantageous before retrospection can be permitted here. In effect, he must provide convincing evidence that the previous method was unfair or, at the very least, that the end result achieved by the proposed new method produces a substantially more accurate attribution of values than the old method. Whatever the position, the proposed new method can of course be allowed from a current date.

Apportionment operated correctly in the past but discovery of an error not directly connected to the method of apportionment leads to trader requesting retrospective use of a different method

In this situation, an acceptable apportionment method was in use (with or without specific VAT Office agreement) but, for example, a supply that should have been exempt was incorrectly treated as standard-rated. As a result the trader proposes a different apportionment method when the error is discovered. The question arises as to whether he should recalculate the past periods by applying the old method to the corrected liabilities or whether the recalculation can be performed using the “new” method.

This scenario creates the same difficulty as the previous one and should be treated in the same way - it is not sufficient for the trader simply to show that a recalculation using the “new” method is more advantageous to him than a recalculation using the old method. The “new” method should only be given retrospective effect if the trader can satisfy you that a recalculation under the new method is significantly more accurate.

Acceptable method of apportionment operated incorrectly in the past, trader requests retrospective use of a different method

In this scenario, the trader has either agreed a method with a VAT Office or used one of the suggested Notice 700 methods but, in operating it, there has been some flaw. For example, a costs-based method was used but the trader had incorrectly been attributing some costs to zero-rated supplies that were properly attributable to standard-rated supplies. All supplies made by the trader, however, had been identified and given their correct liabilities.

Here we would normally expect a recalculation for the past periods to be performed using the old method with the correct operation. Any new method should only be accepted from a current date unless the trader can demonstrate that the old method when operated correctly produced an unfair result or was significantly inaccurate compared to the new one.

Past agreed apportionment method inherently defective, trader requests retrospective use of a different method

This is perhaps the unlikeliest scenario, but it is possible that the past apportionment method agreed between a trader and VAT Office may have been inherently defective. For example, it may have been agreed that the zero-rated supplies made in return for a subscription payment be valued by totalling the normal selling-prices of the zero-rated supplies and expressing these as a proportion of the total costs of all supplies made in return for the subscription. This would result in over-inflation of the value of the zero-rated supplies (unless normally sold on at cost). Acceptable methods normally involve the use of “like-with-like” so that either the selling prices of the zero-rated supplies should have been expressed as a proportion of the total selling-prices of all the supplies or the costs of zero-rated supplies should have been expressed as a proportion of the total costs.

In this case there has not been a “proper attribution” of values as required by Section 19(4) of the VATA 1994. Retrospection should therefore be allowed in this situation if the proposed method is acceptable.

The above scenarios are all instances where the question of applying an apportionment to past periods arises at the trader’s instigation. Another common situation is where you discover that a trader has been applying an apportionment that has not resulted in a “proper attribution” of values.

If a trader has adopted one of the suggested apportionment methods contained in Section 32 of Notice 700 The VAT Guide, and you subsequently discover that the end result is not fair, change from a current date only will be the usual action when the existing method has been operated correctly.

If, however, the operation of the chosen method was flawed, e.g. the trader was attributing costs to zero-rated supplies that were properly attributable to standard-rated supplies, then it may be appropriate to issue an assessment in respect of the past period.