Business v Non-business apportionment

Charities will be able to recover the VAT charged to them on expenditure relating to business activity that results in taxable supplies being made. They will not be able to recover the VAT relating to non-business activities, unless they fall within Section 33 of the VAT Act 1994, as set out in the section on Outsourcing by Public Bodies.

If the VAT is used partly for business activities and partly for non-business activities, an apportionment must be made and the proportion related to business activities recovered to the extent that it relates to taxable business activities. Essentially, it is necessary to identify items of expenditure that have a direct and immediate link with taxable business or intended taxable business supplies.

There is no set method for apportioning the VAT to business use; but the method used must be ‘fair and reasonable’. The objective of the apportionment is to establish the extent to which the VAT on the costs incurred is used for the purpose of the business. While a method based on income (for example, establishing business income as a proportion of total income) might be a simple calculation, there is no necessary correlation between costs and income and, therefore, this may not provide a satisfactory result. Other methods might be based on, for example, expenditure, time, floor space or transaction counts.

From 1 January 2011, HMRC has been able to approve a business/non-business method of apportionment but not if the charity is also partly exempt. If the charity is also partly exempt, HMRC can approve a proposed method so long as the VAT incurred on expenditure is attributed to the different types of activities and the resultant recovery fairly reflects the link to taxable business supplies. This means that if a charity has non-business activities and also makes VAT exempt business supplies, HMRC can approve use of a single method of apportionment covering all of its activities (i.e. an apportionment to reflect the non-business activities, VAT exempt business activities, and taxable business activities). This will be useful if the charity wants to avoid having to apply to HMRC for the approval of two separate apportionment methods.

Unlike with partial exemption there is no statutory de minimis level in terms of a monetary or percentage figure for non-business related methods. HMRC may use its discretion to allow a waiver of apportionment – it will make a judgment as to whether the benefit in terms of revenue is outweighed by the cost to the organisation and to HMRC in carrying out and checking the apportionment. If a waiver is allowed, the concession only applies for as long as the existing rate of non-business activity continues.

For further information see HMRC VAT Manual VBNB30000 – Apportionment of tax.

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