Multiple supplies ― output tax apportionment

By Tolley
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The following Value Added Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Multiple supplies ― output tax apportionment
  • Apportioning output tax in mixed supply situations
  • Apportionment based on selling prices
  • Apportionment based on the cost of both supplies
  • Cost-based apportionment (where only the value of one supply can be determined)
  • Retrospective adjustments of apportionment
  • Errors
  • HMRC assessment after unfair apportionment
  • Conclusion

Apportioning output tax in mixed supply situations

If a business has decided that it is making a single transaction that comprises of two or more supplies that are liable to different rates of VAT, the business will need to work out the most appropriate method to apportion the amount charged between the different types of supply. The business will need to apportion the amount charged between the different components in order to calculate the correct amount of VAT due on the supplies that are liable to VAT at either the standard or reduced rate of VAT. Obviously, if both supplies are liable to VAT at the same rate, then the business will simply charge VAT on the full value of the supply made.

Notice 700 , para 8.1; VATSC80000

HMRC expects businesses to allocate a fair proportion of the total value to each of the supplies in order to ensure that the right amount of VAT is paid. HMRC will not allow businesses to ‘value shift’ to an unreasonable extent in order to artificially reduce the amount of VAT due on the supply made. There is no prescribed method of carrying out the apportionment but the emphasis is on fairness and achieving a reasonable end result.

When calculating output tax payable in multiple supply situations, the aim is to ensure a ‘fair and reasonable’ approach is adopted. HMRC is unlikely to challenge specific methods if the end result is that a reasonable amount of VAT is declared on the supply.

In practice, there are two main methods of apportioning output tax:

  • cost-based apportionment
  • apportionment based on selling prices

These provisions do not include travel-related supplies as VAT must be accounted for using the Tour Operators Margin Scheme and more information

More on Single or multiple supplies: