The VAT rules for items that are for both business and personal usage can initially appear relatively straightforward, with the key stipulations being:

  • You can reclaim VAT on items you buy for use in your business if you’re VAT registered; and
  • If any items are also for personal use, you can only claim the business proportion of the VAT.

Essentially, for VAT purposes, the item is treated as if it were two assets – one within the business (the included part) and one outside it (the excluded part).

However, this seemingly simple rule is subject to some more complex conditions and specific exemptions.

Methods for recovering VAT

Businesses do have options when it comes to the method of calculating VAT on mixed-use assets – the important part is deciding how to treat them at the time VAT is incurred on purchasing the asset. This will determine the extent to which the business can recover VAT, subject to any business use for making exempt supplies.

Apportioning the input tax

Most of the time, if a business pays VAT on assets it intends to use for business and non-business or private purposes, it will have to apportion the VAT incurred. The business can then only recover the part that is related to business use (subject to any partial exemption restriction).

Dividing the cost of something between business and private use is called ‘apportionment’.

There is no law as to how the apportionment is arrived at. The only legal requirement is that there should be an apportionment that fairly and reasonably reflects the different purposes to which the goods or services are put. Ordinarily, a business will not propose a detailed method of apportionment but will round in percentage terms based on a sample period.

Examples of apportionment would be:

  • You are a sole trade or partnership and work from home. Your office takes up 20% of the floor space in your house – you can reclaim 20% of the VAT on your utility bills; and
  • If you are a sole trade or partnership and you use the landline or a mobile phone for a mixture of personal and business calls and your business telephone use comes to 60% of your total usage, then you would only be able to reclaim VAT on 60% of the cost.

Records must be kept to support VAT claims and evidence how the business proportion was arrived at. Businesses must also have valid VAT invoices.

The Lennartz method

If a business incurs expenditure on assets or goods that are going to be used for mixed business and private purposes, it has the option of treating the asset as wholly business for VAT purposes.

This option is called the Lennartz mechanism and enables businesses to have full and immediate deduction of the VAT incurred. The VAT is then accounted for on the private use of the business asset in each prescribed VAT return period for the useful economic life of the asset, or a maximum of 5 years (whichever is less).

No recovery of input VAT

Sometimes the decision is made not to include an asset within a business and therefore not recover any VAT incurred on the asset. This may be determined by simplicity of process, or if the business use of an asset is minimal or the amounts of tax involved are insignificant.

Once a business has made this choice, it cannot revisit the VAT that it incurred on the asset, even if the level of business use later increases.

VAT claims for specific assets

There are some assets that present additional complexities when it comes to claiming VAT on the business proportion, examples of this are cars and motoring and farmhouses –  key considerations for these assets are detailed in our Reclaiming VAT factsheet.

The Capital Goods Scheme should be reviewed when discussing input tax on high-value capital assets, specifically where these assets are used for both business and non-business purposes – further guidance on this scheme is also available in our factsheet.

How M+A Partners can help and next steps

In many businesses, personal and business finances are closely linked, and input tax may be claimed incorrectly on expenditures which are partly or wholly for private or non-business purposes. ‘Business purpose’ can be a complicated area in relation to input tax.

M+A Partners’ VAT specialists provide professional guidance on apportioning VAT incurred for business and non-business purposes and partial exemption calculations.

Any apportionment method implemented for ongoing costs should be reviewed regularly and employed as part of the bookkeeping process. Our team ensures business and private usage is accurately recorded and applied to all relevant invoices, helping to avoid any administrative burdens or costly HMRC investigations and fines.

To find out more about how we can assist with your VAT obligations, please get in touch with our expert below or email enquiries@mapartners.co.uk

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