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HMRC internal manual

VAT Valuation Manual

Special valuation provisions: Non-business use of business assets - services - Paragraph 7, Schedule 6, VATA 1994

Non business use of business assets for private purposes or when services are carried out free of charge, there is a supply of services. Valuation is decided by paragraph 7 of Schedule 6 to the VATA 1994:

  1. Where there is a supply of services by virtue of -

(a) A Treasury order under section 5(4); or

(b) Paragraph 5(4) of Schedule 4 (but otherwise than for a consideration),

The value of the supply shall be taken to be the full cost to the taxable person of providing the services except where paragraph 10 below applies.

This mirrors the valuation provision contained in Article 75 of the EC Directive 2006/112:

In respect of the supply of services……where goods forming part of the assets of a business are used for private purposes or services are carried out free of charge, the taxable amount shall be the full cost to the taxable person of providing the service.

Before considering the valuation question, you need to be satisfied that a taxable supply of services has taken place. As with disposals of business goods or assets, no supply will be deemed to have taken place when there is no consideration and input tax was not wholly or partly deductible. If you have been unable to resolve the question of whether or not there is a deemed supply after consulting VAT Supply and Consideration VATSC, consult the Deductions and Financial Services team on any questions on whether the input tax is partly or wholly recoverable.

As with paragraph 6 of Schedule 6, the provisions of paragraph 7 do not apply to supplies made by employers to employees where the supplies are of types described in paragraph 10 of that Schedule.

Until 1993, we had interpreted “full cost” as being all costs associated with the non-business use of the item excluding capital costs. However, our current policy has been adapted in light of the European Court’s decision in the case of Finanzamt Munchen III v Gerhard Mohsche (ECJ Case No. C-193/91).

Mohsche used his firm’s vehicle for private purposes. The German tax authority assessed for tax on the basis of depreciation of the vehicle and a percentage of all the expenses that had been incurred in its operation and maintenance. The ECJ found that the taxation of private use of business goods was not to include the use of services supplied by third parties in operating or maintaining those goods when no input tax was deductible upon those services. The effect of that decision is that the only costs to be taken into account when valuing non-business use of business goods are taxable costs. This would therefore exclude costs such as insurance (where exempt) and road fund licences, for example. What remains unclear, however, is what the Article means by full cost when it is now ruled as only covering taxable costs.

This is a matter which has so far remained unconsidered in subsequent cases. Until such time as this becomes settled, therefore, you should regard full costs as meaning “full taxable costs” only.

There is only a deemed supply of services when an item is actually used for non-business purposes. In calculating the value of the supply, you should not take into account any periods when the item is not in use at all. Therefore you determine the costs by taking all the taxable costs (including depreciation, where the item being depreciated was itself originally a taxable supply) for a period, dividing this by the total number of days of use and multiplying that total by the number of days of non-business use. For example, if there were 51 days’ private use and 9 days’ business use over a year, the costs are divided by 60 and multiplied by 51 - the remaining 305 days do not enter into the calculation. This has been confirmed by the European Court’s September 1996 decision in Finanzamt Homburg V Renate Enkler (ECJ case No. C-230/94).

Mrs Enkler was employed in her husband’s tax consultancy firm. She notified the tax authorities that she was carrying on the business of hiring out motor caravans. She deducted input tax on a purchase of a motor caravan and accounted for output tax the bulk of which arose as a result of payments received from her husband. A significant element of the use of the motor caravan was for private use. An assessment was issued on the basis that she had never been acting as a trader. As well as addressing points on economic activity the ECJ confirmed that only the proportion of taxable costs used for business use should be taken into account.

Please see VAT Input Tax VIT25540 for additional guidance on the basis for calculating the value of the charge and in particular the depreciation element.