VBNB30500 - VAT Business and Non-Business: Principles: Why is apportionment of tax needed?
Under VAT Act 1994 Section 24(5) the business must apportion tax so that only tax which relates to their business activities is treated as input tax.
VAT on costs relating solely to business activities is input tax, while VAT on costs relating solely to non-business is not input tax and therefore not deductible. It is important to look objectively at the activity that is taking place and the reasons for which the VAT costs are incurred. VAT is recoverable to the extent that it is incurred in making supplies with a right to deduct. It does not matter what the purpose of the organisation is, but it does matter for what purpose the VAT bearing cost is incurred.
Businesses or organisations may engage in both business and non-business activities and may incur VAT costs on goods and services that relate to both activities. When this happens, the tax must be apportioned to identify the part that is input tax.
An activity may serve both the purpose of promoting the taxable and non-taxable activities. Recovery of VAT incurred on such an activity would be allowed in part, reflecting the dual usage of the costs.
VAT incurred may relate to non-business activity even when there are no visible non-business outputs. For example, if an organisation which only makes taxable supplies but gives away goods and services free of charge may have to make an apportionment. This is because giving away goods or services free of charge is normally a non-business activity.
Businesses that incur VAT costs in relation to non-taxed transactions or non-business activities may claim they are entitled to full recovery of their VAT costs quoting the Court decision in Sveda C-126/14 [2015] BVC 36. Sveda had incurred VAT on costs incurred on the construction of a path to be used by the public free of charge. The court found that there was a direct and immediate link between the VAT costs and the planned economic activity of Sveda and therefore entitled to full VAT recovery. There was a clear finding by the court in Sveda that it was a wholly commercial enterprise and would use the asset entirely for its fully taxable business. It had no non-business activities or purpose with which to link the costs incurred. The decision in Sveda does not establish a new test for deduction of VAT.
This section of the manual gives guidance on what to do when a business pays tax on goods or services that it intends to use for both:
- business activities; and
- non-business activities A business may pay tax on goods and services to be put to both business and private use. Guidance on what to do when a business pays tax on costs that are put to mixed business/private use can be found in VAT Input Tax guidance VIT25000.
Business/non-business apportionment methods should follow broadly the same approach as for Partial Exemption methods. Businesses should always directly attribute as much tax as possible to each of their business and non-business activities. A business/non-business apportionment is not an alternative to direct attribution.
After direct attribution there may be a block of costs which cannot be directly attributed to either category. The tax on this non-attributable expenditure must be apportioned.