HMRC has issued new guidance on the amount of input tax claimable when an element is attributable to non-business (NB) activities.
If an entity is involved in both business and NB activities, eg; a charity which provides free advice and also has a shop which sells donated goods, it is unable to recover all of the VAT it incurs. VAT attributable to NB activities is not input tax and cannot be reclaimed. Therefore it is necessary to calculate the quantum of VAT attributable to business and NB activities. That VAT which cannot be attributed is called overhead VAT and must be apportioned between business and NB activities. There are many varied ways of doing this as the VAT legislation does not specify any particular method. Therefore it is important to consider all of the available alternatives. Examples of these are; income, expenditure, time, floorspace, transaction count etc (similar to those methods available for partial exemption calculations).
The new guidance is mainly as a result of the Sveda ECJ case.
The definition of business and NB here.
Legislation: The VAT Act 1994 Section 24(5).
Further reading
The following articles consider case law and other relevant business/NB issues:
Lajvér Meliorációs Nonprofit Kft. and Lajvér Csapadékvízrendezési Nonprofit Kft