Mixed Taxable and Exempt Activities: Apportioning Input VAT

Split direct inputs first

Identify purchases used only for taxable supplies and only for exempt supplies. Do not dilute clearly attributable inputs through a broad turnover ratio merely because the accounting system uses one expense account.

Identify genuine common overhead

Rent, internet, audit and management costs may support both activities. Determine whether the current law and directive allow credit and what allocation method best reflects actual use.

Choose a defensible basis

Turnover can be practical but may distort use where exempt and taxable activities consume resources differently. Floor area, staff time, transaction count or another operational driver may be better if consistently evidenced.

Reconcile and revisit

Document the formula, data source and review date. Recalculate when a new line of business, major asset or unusual transaction changes the relationship between taxable and exempt operations.

A practical control to retain

Write a short methodology note explaining the chosen allocation driver, excluded exceptional items and data owner. Run a sensitivity comparison against turnover and at least one operational driver to identify distortion. Keep calculations reproducible from ledger reports rather than manually typed totals. Where the law requires an annual adjustment or a specific method, follow that rule and retain the bridge from provisional monthly claims to the final figure.

For mixed-activity businesses, accountants and reviewers, the sign-off should answer the guide's four core questions in writing: Directly attribute inputs where possible. Only common inputs need apportionment. Use a reasonable consistent method. Review the method when operations change. Record who checked those answers, the source date and any unresolved fact. If a later invoice, contract or Schedule amendment changes one answer, reopen the classification or return treatment instead of silently carrying the old assumption forward.