Where a business undertakes activities on which VAT is chargeable (at the standard, reduced or zero rate) as well as those that are exempt, there are often problems in ascertaining how much input VAT relates to the exempt activity and is thus not recoverable as input tax.
In practice, a variety of methods are in use to apportion expenses for the purposes of calculating the recoverable VAT. A common one in the case of business premises is to make an apportionment on the basis of the floor area used for each type of activity.
In a recent case, a gambling club sought the agreement of HM Revenue and Customs (HMRC) to an apportionment method which was based on the area used for gaming (broadly exempt) and for catering (standard-rated). HMRC argued that the proper method to use would be one based on the turnover of each part of the business. This method would increase the club’s VAT liability.
This sort of argument normally proves successful for HMRC, but in this case it did not. The Tribunal accepted the club’s contention that the costs which had to be apportioned between the two activities were mainly related to the property and that floor area was therefore a more accurate method of apportionment to use than turnover.
Partner Note
London Clubs Management Ltd. TC00154. Reported in Accountancy, November 2009.