Вы находитесь на странице: 1из 43

VALUE-ADDED

TAX
A Guide to Apportionment of
Input Tax
October 2001
This document is a guide to the legislation. It is not a legally binding
instrument. Anyone in doubt about the application of the VAT rules
should contact the appropriate Revenue office (see appendix) andor
see! independent advice.
CONTENTS
1. INTRODUCTION ....................................................................................
2. THE BASIC RULES ON DEDUCTIBILITY .............................................
3. DUAL-USE INPUTS ................................................................................
4. THE PROPORTION OF TAX DEDUCTIBLE ....................................
5. THE PROPORTION OF TAX DEDUCTIBLE FOR A TAXABLE PERIOD
6. THE REVIEW ........................................................................................
7. CORRECTION OF THE ADJUSTMENT ............................................
8. TURNOVER METHOD .......................................................................
9. A SECTORAL APPROACH ..................................................................
10. DATE OF INTRODUCTION: TRANSITIONAL ARRANGEMENTS
11. SPECIFIC AREAS: INTRODUCTION..................................................
12. LEASING, HIRE-PURCHASE AND LOANS ....................................
13. NON-TAXABLE ACTVTE! " #$ANT!% !UB!DE! AND DVDEND!
14. PRIVATE USE OF DUAL-USE INPUTS, SELF SUPPLIES AND
APPORTIONMENT. ...............................................
15. ENQUIRIES ....................................
1. INTRODUCTION
1.1 The right of a taxable person to deduct VAT on his or her inputs is a central
part of the Value Added Tax system. The right to deduction is provided for in
section 12 of the Value Added Tax Act 1972 (as amended. A general outline
of the rules is set out in paragraphs !.! to !.12 of the "uide to Value Added
Tax 1999.
1.2 This "uide deals #ith the apportionment of input tax. Apportionment arises
#hen a taxable person is not entitled to deduct the full amount of VAT on his
or her inputs.
1.3 $ection 112 of %inance Act& 2''' substituted a ne# subsection (( into
section 12 of the VAT Act #ith effect from 2) *arch& 2'''. This subsection
provides the legislative basis for the apportionment of input tax. The Value
Added Tax (Apportionment +egulations& 2''' ($.,. -o. 2.( of 2''' (the
/Apportionment +egulations0 #ere enacted by +evenue #ith effect from 1
$eptember& 2'''. These +egulations provide the procedural details to give
full effect to the primary legislation.
1.4 There are t#o parts to this "uide. 1hapter 2 to 1hapter 1' gives an overvie#
of the legislation& #hile 1hapter 11 to 1hapter 1( outlines the implications of
the legislation for the most affected sectors& for example& 1hapter 12 deals
#ith the financial services sector. 1hapter 2 sets out the basic rules on
deductibility. 1hapters ) and ( explain the concept of dual2use inputs and
the proportion of tax deductible on the ac3uisition of dual2use inputs.
1hapter . deals #ith the application of the apportionment rules for a taxable
period #hile 1hapter ! explains the concept of the annual revie# and
ad4ustment of the apportionment method. 1hapter 7 sets out the
circumstances #hen interest and penalties on any incorrect ad4ustments #ill
be #aived. 1hapters 5 and 9 deal #ith the turnover method of apportionment
and the sectoral approach to apportionment. 1hapter 1' sets out the date of
introduction and transitional issues. 1hapters 11 to 1( deal #ith specific
areas such as incidental property and incidental financial transactions&
financial services such as leasing& hire purchase and stoc6ing loans& and the
effect of non2taxable receipts such as grants and dividends& and the
interaction #ith private use.
2. THE BASIC RULES ON DEDUCTIBILITY
2.1 A taxable person is entitled (#ith some exceptions 2 see paragraph 2.) to
deduct VAT payable on his or her inputs #hen these inputs are attributable to
the taxable supply of goods or services or 3ualifying activities (see paragraph
2.2. A taxable person is not entitled to deduct any VAT on his or her inputs if
these inputs are not attributable to taxable supplies or 3ualifying activities.
2.2 ,nput tax is generally not deductible if it does not relate to taxable supplies.
7o#ever& as an exception& input tax is deductible if it relates to certain non
taxable supplies 6no#n as 83ualifying activities9 and they are generally as
follo#s:
transport outside the $tate of passengers and their accompanying
baggage;
certain financial and insurance services supplied outside the <= or
services directly in connection #ith the export of goods to a place
outside the <=;
supplies of goods and services outside the $tate #hich #ould be
taxable supplies if made in the $tate apart from passenger motor
vehicles for hiring out for utilisation #ithin the $tate.
2.3 >n the other hand& VAT is not deductible on the purchase or ac3uisition of the
follo#ing goods and services& even #hen the goods and services in 3uestion
are attributable to the taxable supply of goods or services or 3ualifying
activities:
expenses incurred on the provision of food or drin6& or
accommodation or other personal services& for the taxable person&
his or her agents or employees& except to the extent& if any& that
such provision constitutes a supply of services in respect of #hich
he or she is accountable for VAT;
expenditure incurred by a taxable person on food or drin6& or
accommodation or entertainment services& #here such expenditure
forms all or part of the cost of providing an advertising service in
respect of #hich tax is due and payable by the taxable person;
entertainment expenses incurred by a taxable person& his or her
agents or employees;
the ac3uisition (including hiring of passenger motor vehicles
other#ise than as stoc62in2trade (that is& for resale or for use in a
vehicle hire or driving school business;
the purchase of petrol other#ise than as stoc62in2trade;
contract #or6 involving the handing over of goods #hen such goods
are themselves not deductible.
2.4 $ection 12(( and the Apportionment +egulations set out the deductibility
rules applicable #here goods and services are not used solely for the
purposes of taxable supplies or 3ualifying activities.
3. DUAL-USE INPUTS
3.1 $ection 12(( of the VAT Act defines a number of terms #hich are central to
the rules on apportionment. The 6ey term used is that of 8dual2use inputs9.
?ual2use inputs are goods and services that are not ac3uired solely for the
purposes of 8deductible supplies or activities9 or for the purposes of 8non2
deductible supplies or activities9. An example of dual2use inputs #ould be
#here a ban6 purchases a computer #hich is used to process both leasing
transactions& #hich are sub4ect to VAT& and personal loans& #hich are exempt
from VAT. The computer is a dual2use input and the VAT payable on its
purchase must be apportioned bet#een the amount #hich is deductible and
that #hich is not.
3.2 ,f a taxable person purchases& ac3uires or imports dual2use inputs then the
VAT incurred must be apportioned in accordance #ith section 12(( and the
Apportionment +egulations. There are three broad types of dual2use inputs:
consumables such as stationery #hich are used in ma6ing the
supplies or carrying out the activity;
general overheads such as electricity and audit fees;
capital goods such as premises& computer systems& etc.
4. THE PROPORTION OF TAX DEDUCTIBLE
4.1 There is a basic rule governing the proportion of input tax deductible on dual2
use inputs. The taxable person has an entitlement to deduct
...a proportion of tax deductible which correctly reflects the extent
to which the dual-use inputs are used for the purposes of that
persons deductible supplies or activities and has due regard to
the range of that persons total supplies and activities
2section 12(((c.
The entitlement to deduct input VAT is& of course& dependent on the input tax
being attributable to some extent to a taxable supply or 3ualifying activity. To
arrive at the correct result& there are many #ays of calculating the deductible
proportion& for example& the ratio of taxable turnover to total turnover& the
ratio of taxable transactions to total transactions& an area based calculation&
etc
4.2 The 6ey point is that there are t#o specific conditions #hich must be met.
The proportion must correctly reflect the use to #hich the inputs are put and
also reflect the range of the taxable person9s activities.
4.3 Any method #hich meets these conditions may be used by a taxable person
to calculate the proportion of tax deductible. The taxable person decides the
method to be used and the result of this method must meet the t#o
conditions. 7o#ever& the taxable person must be able to& on re3uest&
demonstrate to the satisfaction of +evenue that the method used results in a
correct proportion of deductible tax.
4.4 The follo#ing example illustrates that the proportion must correctly reflect the
use to #hich the inputs are put.
Example 4(a!
A finance company engages in taxable leasing and exempt personal loans as
follo#s:
Nu!"# $ V%&u" $
L"%'()* %*#""")+' ")+"#", ()+-: 75 60 &750%000 42.9
P"#'-)%& &-%)' ")+"#", ()+-: 50 40 &1%000%000 57.1
Tot'() 125 100 &1%750%000 100
,n this case the number of leasing agreements entered into represents !'@
of the total number of transactions but only (2.9@ of the total value of the
finance granted. ,n this example& the finance company can demonstrate that
each transaction re3uires the same level of inputs regardless of its value.
Therefore& it can demonstrate that the proportion of tax deductible should be
calculated on the basis of the proportion of the taxable transactions in the
total transactions rather than on a turnover basis and it can deduct !'@ of
the tax incurred on its dual2use inputs.
("his is a simplified example for illustrative purposes only. #n a real case
involving leasing and personal loans there will be a range of existing leases
and loans in place in addition to new agreements entered into. #n these
circumstances while the number of transactions will be relevant other
measures such as interest received$ number of staff involved$ etc. may well
provide a more realistic basis.
4.5 Ahile it is relatively easy to understand the concept of use& some concern
has been expressed about the meaning of the second condition& i.e.& that /the
proportion of tax deductible ........ has due regard to the range of that person9s
total supplies and activities0. This means that any method of calculating the
proportion of tax deductible must also have regard to the entire activities of
the taxable person.
4.6 This condition covers t#o different types of circumstances. %irstly& many
general overheads are not directly used in ma6ing supplies. %or example a
company9s audit fee #ill relate to the full range of the company9s activities and
the method of apportionment must have regard to this. $econdly& in addition
to their taxable and exempt activities& a number of taxable persons carry out
regulatory and statutory activities #hich are outside the scope of VAT. These
activities may be funded by grant aid& levies& etc. ,f these activities are& for
example& carried out in the same building as the taxable activities& input tax in
relation to the premises& lighting& heating& etc. must be apportioned having
regard to all the activities& both business and 8non2business9& of the taxable
person.
4.7 ,n effect& the method used to calculate the proportion #ill depend on the
individual circumstances of the case. The decision on #hat method to use is
primarily the responsibility of the taxable person. The taxable person must be
able to demonstrate& on re3uest& to the satisfaction of +evenue that the result
of the calculation is reasonable.
4.8 The basic VAT system provides that VAT is deductible #here the goods or
services are inputs in relation to a taxable or 3ualifying output. 1hart A
(overleaf illustrates the system.
CHART A DEDUCTBLE TAX
VAT o*
+,rc-'.e.%
CA.%
/0ort.
B&-./",
I)0u+'
".*. .%#',
0"+#-&
VAT )-+
,",u.+(!&"
*0,t.
*ot b(oc1e2
A++#(!u+%!&" +-
+%1%!&" %),
2u%&(34()* %.+(5(+("'
A++#(!u+%!&" +-
"1"0+ -# )-)-
+%1%!&" %.+(5(+("'
Not .o(e(3
'ttr4b,t'b(e to
e4t-er t'5'b(e or
*o*-t'5'b(e
D",u.+(!&"
N-+ ,",u.+(!&" D,'(-U.e *0,t.
6et-o2 to '00ort4o*
bet7ee* 2e2,ct4b(e '*2 *o*-
2e2,ct4b(e
VAT *ot
De2,ct4b(e 0-#+(-)
VAT De2,ct4b(e
0-#+(-)
5. THE PROPORTION OF TAX DEDUCTIBLE FOR A TAXABLE
PERIOD
5.1 The proportion of tax deductible in relation to dual2use inputs should be
calculated using a method #hich correctly reflects the use to #hich the dual2
use inputs are put and reflects the range of the activities carried out in a
taxable period. As this #ould entail a ne# calculation for every taxable
period& the Apportionment +egulations provide that the taxable person may
use any of the follo#ing to calculate the proportion of tax deductible for a
taxable period:
a method #hich correctly reflects the use and range for that taxable
period;
the proportion of tax #hich #as deductible for the previous revie#
period (i.e. the previous financial year or calendar year; see section !
belo#;
the taxable person9s estimate of #hat proportion of tax deductible
correctly reflects the use and range for the revie# period #ithin #hich
the taxable period ends (the current revie# period.
5.2 ,n effect the taxable person can calculate his or her proportion of tax
deductible on a correct basis for the taxable period& or on the basis of the
previous revie# period9s results or on the basis of an estimate of the current
year9s li6ely out2turn. >bviously the circumstances of the case #ill determine
the most suitable method. ,t is envisaged that the previous revie# period9s
out2turn #ill be the most straightfor#ard approach but there #ill be situations
#here this approach is neither possible& for example& a start up& nor
appropriate due to a significant change in the mix of the business activities.
5.3 ,f a person #ishes to apportion his or her inputs based on an estimate of the
li6ely out2turn of the current revie# period then that person must submit
details of the basis of that estimate to that person9s +evenue audit office (see
appendix. These details must be submitted at the same time as the VAT
return is sent separately to the 1ollector2"eneral9s >ffice. ,f an audit officer
is not satisfied #ith the basis of the estimate& the audit officer may re3uire the
taxable person to use a different basis of calculation for that return and
subse3uent returns #ithin that current revie# period.
5.4 There are a number of options for a taxable person to apportion his or her
dual2use inputs for a taxable period. A series of examples #ill illustrate the
possibilities:
Example %(a
A partially taxableBexempt company is preparing its $eptemberB>ctober 2''1
return. ,ts financial year2end is )' April and its proportion of tax deductible
for the year ended )' April 2''1 #as !'@. ,n $eptemberB>ctober 2''1 one
of its contracts re3uired an unusual level of inputs. ,t is satisfied that the
!'@ proportion significantly overestimates the proportion of tax deductible for
that period. 7o#ever& it is entitled to use that proportion. $ince this #ould
result in the build2up of a VAT liability it chooses to calculate an accurate
proportion of tax deductible using a method #hich correctly reflects the use to
#hich dual2use inputs are put and the range of business activities carried out
for $eptemberB>ctober 2''1. ,n this example& the company is satisfied that it
can demonstrate the accuracy of the calculation if re3uired by +evenue. The
$eptemberB>ctober 2''1 return must& of course& be revie#ed as part of the
annual revie# &see 'hapter ().
Example %(b
A partially taxableBexempt company has a reasonably stable mix of taxable
and exempt activities. ,t uses the previous year9s proportion in calculating its
tax deductible on its dual2use inputs.
Example %(c
A partially taxableBexempt company registers for VAT on 1 Culy 2''1. ,ts
financial year2end is )' Cune. ,ts business plan and pro4ections for its first
year9s trading suggests that the taxable business #ill represent 2'@ of its
total business. ,t is satisfied that a turnover based method of apportionment
provides the best basis for correctly apportioning the VAT incurred on its
dual2use inputs. The company submits its CulyBAugust 2''1 return by 19
$eptember 2''1 to 1ollector "eneral and at the same time submits details of
its apportionment system supported by its first year trading pro4ections to the
appropriate tax office. The company can continue to use this basis in
completing the returns to *ayBCune 2''2 #hen its first revie# period ends
and it revie#s its apportionment ratio. ,n this case the tax office has not
directed the company to use a different method to calculate its deductible
proportion.
5.5 ,f a taxable person accounts for VAT on an annual basis he or she has three
options for calculating his or her proportion of tax deductible on dual2use
inputs for its annual return:
the actual proportion for the period;
the previous year9s results; or
an estimate of the proportion for the period.
The first method is the preferred method in that it has regard to the actual
out2turn for the period in 3uestion. 7o#ever& 4ust as in the case of a person
accounting on a bi2monthly basis& it is not al#ays possible to complete a
revie# in the time available to submit the return. ,n these circumstances both
the other options are available to a person on an annual return (see
paragraphs ..1 2 ..(. ,f the person uses an estimate of the proportion& the
rules set out in paragraph ..) #ith regard to notification of the relevant
+evenue office apply.
6. THE REVIEW
6.1 $ection 12(( and +egulation ! of the Apportionment +egulations provide
that the proportion of tax deductible for a taxable period is sub4ect to revie#
on an annual basis. There are t#o important definitions in relation to the
revie# mechanism /accounting period0 and /revie# period0.
An !!"#$%&$' ()*&"+ is the taxable person9s normal accounting year or if
the taxable person does not have a normal accounting year it is the
calendar year.
A *),&)- ()*&"+ is a period consisting of all the taxable periods that end in
an accounting period. The t#o definitions can best be illustrated by an
example:
Example ((a
A taxable person9s financial year ends on )1 *arch. Therefore the
!!"#$%&$' ()*&"+ is the 12 months ending on )1 *arch #hile the related
*),&)- ()*&"+ is the six taxable periods *archBApril to CanuaryB%ebruary.
6.2 The purpose of the revie# is to ensure that the proportion of tax deductible in
respect of the purchase& ac3uisition or importation of dual2use inputs for the
revie# period correctly reflects the extent to #hich the dual2use inputs #ere
used for the purposes of a person9s deductible supplies or activities and has
due regard to the range of that person9s total supplies or activities for the
revie# period. Therefore& the taxable person must revie# the proportion of
tax deductible in relation to dual2use inputs for the six taxable periods in the
revie# period and ad4ust his or her input tax accordingly.
6.3 The ad4ustment must be made in the taxable period follo#ing the end of the
revie# period or in a later period agreed bet#een the taxable person and
+evenue (see paragraph !.(.
Example ((b
A taxable company9s financial year ends on )1 *arch 2''2. ,ts revie# period
is the year ending 25 %ebruary 2''2. ,t must revie# its proportion of tax
deductible for the year ended 25 %ebruary 2''2 and ma6e any ad4ustment in
its deductible VAT for *archBApril 2''2.
6.4 +evenue recognise that a revie# of the proportion of tax deductible may be
complicated and for that reason accepts that the ad4ustment may be made in
any of the three taxable periods immediately follo#ing the end of the revie#
period. Therefore& in example ((b the ad4ustment may be made in the
*archBApril& *ayBCune or CulyBAugust 2''2 returns. Drior agreement need
not be sought from +evenue to exercise this option. 7o#ever& if the
ad4ustment is not made in any of the three periods +evenue #ill treat any
overclaim of deductible VAT as proper to the first of the three returns for the
purposes of calculating any interest or penalties due as a result of that
overclaim.
6.5 ,f there are special circumstances #hich mean that the revie# cannot be
completed in time for inclusion in the third return then prior agreement is
re3uired from the relevant +evenue office. ,n these situations the taxable
person should state in #riting the reasons #hy the revie# cannot be
completed and the taxable period #ithin #hich the ad4ustment #ill be made.
The taxable person #ill be advised by +evenue #hether the re3uest is
agreed to or not. As +evenue have already granted a six month time frame
for the ad4ustment to be made& re3uests #ill only be granted in exceptional
circumstances.
6.6 Although the ad4ustment for a revie# period is usually made in a subse3uent
taxable period& this is not the case in respect of a final accounting period. ,n
this situation the ad4ustment must be made in the return for the last taxable
period. Again t#o examples #ill illustrate the position:
Example ((c
A company9s financial year end is )' April. ?ue to cessation the company9s
final accounting period is the year ended )'B(B2''2. ,ts revie# period is the
six taxable periods to )'B(B2''2. Any ad4ustment arising out of the revie#
should be included in the return for *archBApril 2''2.
Example ((d
A company9s financial year end is )' April. The company ceased trading on
)1 August 2''2. ,ts final accounting period is from 1 *ay to )1 August 2''2.
,t must revie# its proportion of tax deductible for these months and ma6e any
ad4ustment in its CulyBAugust 2''2 return.
6.7 Ahere a taxable person accounts for VAT on an annual basis and does not
base his or her return on the actual out2turn for the annual period (see
paragraph ...& that person must also revie# his proportion of tax deductible
and incorporate any ad4ustment in his or her next annual return.
7. CORRECTION OF THE AD.UST/ENT
7.1 The calculation of the deductible proportion in relation to dual use inputs for a
taxable period and the revie# and subse3uent ad4ustment is sub4ect to audit
and examination by +evenue. The method of calculation must be supported
by ob4ective evidence. The Apportionment +egulations provide that& sub4ect
to certain conditions& interest #ill not be payable on any additional liability
arising out of an incorrect ad4ustment for a revie# period.
7.2 The conditions& all of #hich apply& are that:
(a the ad4ustment does not involve fraud or negligence;
(b the taxable person submitted details to the relevant +evenue office
setting out the basis of the ad4ustment by the due date for
submission of the return in #hich the ad4ustment #as made;
(c the additional liability is paid #ithout +evenue having to raise an
assessment to recover the tax.
8. TURNOVER /ETHOD
8.1 Eefore the introduction of the ne# section 12(( a taxable person #as entitled
to use the turnover method of apportioning VAT on dual2use inputs. $ection
12(((d 3ualifies the entitlement to use the turnover method. A person is
entitled to use the turnover method "$01 if the results correctly reflect the use
to #hich the dual2use inputs are put and has due regard to the range of that
person9s activities.
8.2 The turnover method is based on the ratio of turnover from deductible
activities to the total turnover of that person9s business. The follo#ing
example illustrates the concept #here the non2taxable turnover comes from
exempt activities only:
Example *(a
A company9s turnover is bro6en do#n as follo#s:
Taxable supplies F1''&'''
Gualifying activities F.'&'''
<xempt activities F).'&'''
Total turnover F.''&'''
$tandard turnover method 1''&''' H .'&''' x 1'' I 323
.''&'''
=nder the turnover method the company is entitled to deduct 323 of the VAT
incurred on its purchase& ac3uisition or importation of dual2use inputs.
8.3 The turnover method has traditionally been seen as the standard method of
apportionment as the level of turnover generally provides an ob4ective
measure of the relative use of dual2use inputs. 7o#ever& the standard
turnover method may not be appropriate #here the taxable person is in
receipt of dividends& grants& subsidies and other 8non2income9 receipts.
(These issues are dealt #ith in greater detail in paragraphs 1).1 to 1).1'.
8.4 Ahere there are significant receipts from activities that are not exempt a
variant of the standard turnover method may be appropriate. This involves
including the other receipts in the denominator. The follo#ing example
illustrates this approach:
Example *(b
A company carries out taxable activities and a statutory function on behalf of
a ?epartment of $tate. The company has three sources of funds:
+eceipts from taxable supplies F.'&'''
Jevy on groups regulated by the company F1''&'''
"rant from ?epartment F.''&'''
Total %unding F!.'&'''
-on2standard turnover method:
.'&''' x 1'' I 7.73
!.'&'''
=nder this variant of the turnover method the company is entitled to deduct
7.73 of the VAT incurred on its purchase& ac3uisition or importation of its
dual2use inputs. This compares #ith 1''@ deductibility if the standard
turnover method #as allo#ed.
8.5 $ection 12(((e(ii of the VAT Act provides that certain transactions should
be excluded from the turnover method if their inclusion distorts the result.
There are t#o types of supplies that may be excluded 2
incidental financial transactions& and
incidental property transactions.
The purpose of excluding these incidental transactions is because their
inclusion #ould distort the apportionment system. Ahether a supply is an
incidental one #ill depend on the circumstances in #hich it occurs. ,f a type
of transaction forms an integral and recurring part of the business activity of a
company9s activities then it is unli6ely to be incidental. The 6ey element is
#hether the inclusion of the transactions distort the calculation of the
proportion of tax deductible. Again a series of examples #ill illustrate the
concept:
Example *(c
A #holesaler supplies taxable goods and its normal range of business is
1''@ taxable. >n a once2off basis it charges one of its customers interest
on late payment of the customer9s account. The interest is exempt from VAT
but since the transaction is an incidental financial transaction apportionment
is not re3uired and VAT is fully deductible on its dual2use inputs. Any VAT on
inputs that are #holly attributable to the exempt interest charge is& of course&
not deductible.
Example *(d
A retail outlet sells goods on a full payment basis and on a credit sale basis.
('@ of its sales are on a credit basis& on #hich it receives average interest of
1.@. The brea6do#n of its turnover is as follo#s:
1ash sale of goods F!''&'''
1redit sale of goods F(''&'''
,nterest received on credit sales F !'&'''
Total turnover F1&'!'&'''
,ts proportion of tax deductible on dual2use inputs is calculated as follo#s:
!'' H ('' x 1'' I 44.33
1&'!'
,n this case the supply of credit is not an incidental transaction and must be
included in the calculation of the deductible proportion.
Example *(e
A ban6 decides to close t#o branches and sell the t#o premises. >ne of the
properties is developed for VAT purposes and the sale is sub4ect to VAT #hile
the other is not developed and the sale is exempt from VAT. ,n addition to the
t#o branches the ban6 also has a significant property portfolio #hich it leases
on a long2term basis. These leases have been chargeable to VAT& sub4ect to
the normal VAT on property rules. ,n this case& although property
transactions form an integral part of the ban69s activities& both branch sales
are incidental to its overall business and should be excluded from the
turnover apportionment exercise. ,nputs directly attributable to the supply of
the 8taxable branch9 are deductible #hile those directly attributable to the
8exempt branch9 are not.
8.6 The exclusion of certain incidental transactions from the calculation of the
proportion of tax deductible on the dual2use inputs also applies to methods
other than the turnover method.
8.7 %or the purposes of accounting for VAT on the receipt of %ourth $chedule
services from abroad (see paragraph (.5 of the "uide to Value2Added Tax&
1999 andBor ,nformation Jeaflet -o. 9B'1& /+eceived $ervices0& a taxable
person is treated as if he or she is supplying these services to him or herself.
This is a legislative drafting mechanism to ensure that the normal rules on
payment& collection& etc. apply to any liability that a taxable person incurs in
relation to these %ourth $chedule services. The consideration payable to the
non2established supplier in relation to the receipt of these services is not
turnover for the purposes of section 12(( of the VAT Act. Therefore& the
consideration payable in respect of the receipt of taxable %ourth $chedule
services or exempt %ourth $chedule services is not included in either
numerator or denominator for the purposes of the turnover method.
4. A SECTORAL APPROACH
4.1 $ection 12(((e(i provides that #here it is appropriate to do so a taxable
person should use a sectoral approach to apportion VAT on dual2use inputs.
Again the taxable person is best e3uipped to determine #hether a sectoral
approach is necessary. The purpose of using a sectoral approach is to
ensure that the results achieved best reflect the use to #hich the dual2use
inputs are put and has due regard to the full range of the taxable person9s
activities. >bvious areas #here a sectoral approach may be appropriate is in
the context of group registrations or #here there are separate branches or
distinct accounting divisions #ithin a company.
4.2 Ahere a sectoral approach is used& a series of calculations is re3uired for
each sector of the business. ?ifferent methods of calculation may be used
for the sectors& for example& one sector may use the turnover method #hile
another may be based on the number of transactions.
4.3 As is the case for any method of apportionment the taxable person must be
able to demonstrate to the satisfaction of +evenue if re3uired& that the
sectoral approach is the most appropriate method. A sectoral approach can
only be used #here separate sectoral records are 6ept.

12. DATE OF INTRODUCTION5 TRANSITIONAL ARRAN6E/ENTS
12.1 There are a number of important dates in relation to the changes in the
apportionment rules. $ection 12(( #as introduced #ith effect from 2)
*arch& 2''' (the date of passing of the 2''' %inance Act. The
Apportionment +egulations have effect from 1 $eptember& 2'''.
12.2 The effect of these dates is that:
the return for the period *ayBCune 2''' and all subse3uent returns
are sub4ect to the ne# section 12((;
the first revie# period governed by the Apportionment +egulations
is the financial year ending )1st August& 2''1. This means that& for
an individual taxpayer& his or her first revie# period #ill be based
on his or her first accounting period ending on or after )1st August&
2''1. ,f that person does not have an annual accounting year his
or her first revie# period is the calendar year 2''1;
transitional arrangements as set out belo# apply to periods
*ayBCune& 2''' to CulyBAugust& 2''1 and to the first revie#;
returns for periods $eptemberB>ctober 2''1 and subse3uent
periods must be in accordance #ith the provisions of section 12((.

12.3 +evenue recognise that prior to the issue of this guide some taxpayers
#ere not in a position to revise their apportionment system before
submission of their VAT returns for the transitional period (1
st
*ay 2'''
to )1
st
August 2''1. Accordingly +evenue is prepared to allo#
leniency in relation to compliance #ith the ne# rules for the transitional
period. +evenue #ill allo# taxpayers an opportunity to ma6e
ad4ustments based on an apportionment method #hich meets the t#o
conditions set out in section 12(( #ithout the imposition of interest or
penalties if they comply #ith the rules in paragraphs 1'.( or 1'.. as
appropriate. This concession #ill only apply #here returns during the
transitional period #ere submitted on time and #here the
apportionment system used #as based on the turnover method or a
system previously agreed #ith +evenue but did not in fact meet the
t#o conditions set out in section 12((.
12.4 As there are particular issues #hich arise in respect of the entitlement
to apportionment by 2
(i businesses #hich span the areas of leasing and lending or
hire purchase& and
(ii in the case of entities #hich are in receipt of grants or
subsidies (apart from training grants& employment subsidies
and the li6e&
taxpayers in either of these sectors must fulfil the follo#ing conditions:
They must ad4ust their VAT returns for the transitional
period (1
st
*ay 2''' to )1
st
August 2''1 to reflect the
t#o conditions set in section 12((.

returns may be ad4usted on a period by period
basis or on the basis of one ad4ustment covering
the #hole transitional period
or

returns for *ayBCune 2''' and CulyBAugust& 2'''
may be ad4usted on a period by period basis
together #ith a single ad4ustment covering
$eptember 2''' to August 2''1.
+egardless of the option used they must include any
ad4ustments arising in return(s #hich must be submitted
at the latest by 19 Canuary& 2''2. The liability arising as
a result of the ad4ustment must be paid by the due date.
,n the case of taxpayers on the annual return basis
#hose returns are not based on the calendar year they
must submit a supplementary return and pay any liability
by 19
th
Canuary& 2''2 at the latest.
All taxpayers are obliged to perform the revie# in accordance #ith the
+egulations in the normal #ay after )1
st
August 2''1 (see examples 1'(a
and 1'(b.
+ote! #n the examples ,uoted in this chapter$ the reference to any one of
three returns immediately following- is made in the context of the normal
two-monthly returns$ and does not refer to three annual returns.


Example ./(a
A taxpayer #hose business spans leasing and lending transactions has a
%inancial year ending on )1
st
?ecember. ,n order to benefit from the terms of
this chapter& the taxpayer must ma6e a return by 19
th
Canuary& 2''2 at the
latest #hich includes ad4ustments to the returns submitted for the transitional
period (1
st
*ay& 2''' to )1
st
August& 2''1. The taxpayer9s first revie# #ill
cover the calendar year 2''1. Any ad4ustment arising from that revie# must
be made in a return for any of the three taxable periods immediately follo#ing
)1
st
?ecember& 2''1.
Example ./(b
A taxpayer #ho receives a grant or subsidy #hich gives rise to the necessity
to apportion input VAT has a financial year ending )'
th
April. ,n order to
benefit from the terms of this 1hapter the taxpayer must ma6e a return by
19
th
Canuary& 2''2 at the latest #hich includes ad4ustments to the returns
submitted for the transitional period (1
st
*ay 2''' to )1
st
August 2''1. The
first revie# #ill cover the period from 1
st
*ay 2''1 to )'
th
April 2''2. Any
ad4ustment arising from that revie# must be made in a return for any of the
three taxable periods immediately follo#ing )'
th
April& 2''2.

12.5 Taxpayers other than those referred to in paragraph 1'.( #ho 3ualify
for the concessional treatment must fulfil the follo#ing conditions.
They must ad4ust their VAT returns for the transitional
period (1
st
*ay 2''' to )1
st
August& 2''1 to reflect the
t#o conditions set out in section 12((;
They must perform the revie# as re3uired by the
+egulations after )1
st
August& 2''1.
These t#o re3uirements may be complied #ith in
any one of the three follo#ing methods:
a single ad4ustment may be made covering the
periods from 1
st
*ay& 2''' to the end of the first
revie# period;
or
returns for *ayBCune 2''' and CulyBAugust 2'''
may be ad4usted on a period by period basis
follo#ed by a single ad4ustment covering the
period 1
st
$eptember 2''' to the end of the first
revie# period;
or
returns may be ad4usted on a period by period
basis from 1
st
*ay& 2''' to the start of the first
revie# period& follo#ed by the ad4ustment arising
for the revie# period&
They must include any ad4ustment necessary& in any of the three
returns immediately follo#ing the end of the first revie# period
#ith exception that period by period ad4ustments must be made
at the latest by 19
th
Canuary& 2''2. 0ee examples ./(c$ ./(d
and ./(e following.

,n the case of taxpayers on the annual return basis the
ad4ustment may be made in the return covering the year of the
revie# or the next annual return.
Example ./(c
A taxable person9s financial year ends on )1st *arch. Therefore the
accounting period for the first revie# is the year ending 25 %ebruary 2''2.
The taxable person may choose to:
ma6e an ad4ustment covering the period from 1 *ay 2''' to 25 %ebruary
2''2& and include it #ith one of the three returns immediately follo#ing&
or
ma6e t#o ad4ustments in respect of the periods *ayBCune 2''' and
CulyBAugust 2'''& #hich are included in returns by 19 Canuary& 2''2
follo#ed by one ad4ustment from 1 $eptember 2''' to 25 %ebruary 2''2 and
include it #ith one of the three returns immediately follo#ing&
or
ma6e five ad4ustments in respect of the periods *ayBCune 2''' to
CanuaryB%ebruary 2''1& #hich are included in returns by 19 Canuary& 2''2
follo#ed by one ad4ustment from 1 *arch& 2''1 to 25 %ebruary& 2''2 and
include it #ith one of the three returns immediately follo#ing.

Example ./(d
A taxable person9s financial year ends on )'th April. Therefore the accounting
period for the first revie# is the year ending )'
th
April 2''2. The taxable
person may choose to:
ma6e an ad4ustment covering the period from 1
st
*ay& 2''' to )'th April&
2''2& and include it #ith one of the three returns immediately follo#ing&
or
ma6e t#o ad4ustments in respect of the periods *ayBCune 2''' and
CulyBAugust 2'''& #hich are included in returns by 19 Canuary& 2''2&
follo#ed by one ad4ustment from 1
st
$eptember 2''' to )'
th
April& 2''2 and
include it #ith one of the three returns immediately follo#ing;
or
ma6e six ad4ustments covering the periods *ayBCune& 2''' to *archB April&
2''1 #hich are included in returns by 19 Canuary& 2''2& follo#ed by one
ad4ustment from 1
st
*ay 2''1 to )'
th
April& 2''2 and include it #ith one of the
three returns immediately follo#ing.

Example ./(e
A taxable person9s financial year ends on )1
st
?ecember. Therefore the
accounting period for the first revie# is the calendar year 2''1. The taxable
person may choose to:
ma6e an ad4ustment covering the period from 1
st
*ay 2''' to )1
st
?ecember
2''1& and include it #ith one of the three returns immediately follo#ing&
or
ma6e t#o ad4ustments in respect of the periods *ayBCune 2''' and
CulyBAugust 2''' #hich are included in returns by 19 Canuary& 2''2& follo#ed
by one ad4ustment covering the period from 1
st
$eptember 2''' to )1
st
?ecember 2''1 and include it #ith one of the three returns immediately
follo#ing;
or
ma6e four ad4ustments for periods *ayBCune 2''' to -ovemberB?ecember
2''' #hich are included #ith returns by 19 Canuary& 2''2& follo#ed by one
ad4ustment from 1
st
Canuary& 2''1 to )1
st
?ecember& 2''1 and include it #ith
one of the three returns immediately follo#ing.
12.6 Taxpayers #ho are not entitled to the concessional treatment for the
transitional period referred to in paragraph 1'.) and #hose returns
are not in accordance #ith section 12(( must submit correct returns in
accordance #ith the section immediately& and are liable to interest and
penalties& #here appropriate in the normal #ay.

11. SPECIFIC AREAS5 INTRODUCTION
11.1 Apportionment mainly arises #here the outputs of a business are partially
taxable and partially exempt. The ma4or sector involved here is the financial
services sector. ,n the financial services sector there is often a mix bet#een
taxable supplies& 3ualifying activities and exempt activities. The ma4or
taxable supplies include leasing and property transactions& the 3ualifying
activities are exempt financial services supplied to customers outside the <=
and the exempt transactions are the normal exempt financial services and
exempt property transactions. ,n paragraphs 12.1 to 12.. some of the
implications for the apportionment system of leasing and other forms of
lending transactions are considered.
11.2 Another area #here apportionment may be re3uired is in situations #here
taxable persons #ho in addition to ma6ing supplies in the course or
furtherance of business also carry out some non2business function. These
non2business functions may relate to a statutory or regulatory function.
Alternatively they may relate to the holding of an investment portfolio. These
types of taxable persons #ill usually be in receipt of funding& such as grants&
subsidies or dividends& #hich is outside the scope of VAT. Daragraphs 1).1
to 1).1' consider the implications of these type of receipts for a taxable
person9s right to deductibility.
11.3 %inally apportionment may also arise #here capital goods are used for both
business and non2business purposes. Daragraph 1(.1 deals #ith this.
12. LEASIN67 HIRE-PURCHASE AND LOANS

12.1 The VAT treatment of leasing and hire2purchase is fundamentally different. A
leasing transaction is a supply of services and is taxable in full on the supply
of that service. A hire2purchase agreement is made up of t#o supplies 2
a taxable supply of goods from the supplier of the goods to the
customer& and
an exempt supply of credit from the supplier of the credit to the
customer.
12.2 VAT is fully deductible on any inputs directly attributable to the taxable supply
of leasing services. VAT is not deductible on any inputs directly attributable
to the exempt granting of credit. Therefore& in the case of a company that
only supplies taxable services apportionment of inputs does not arise.
7o#ever& #here leasing companies also supply personal loans and hire2
purchase& apportionment of the VAT on non2directly attributable inputs& i.e.
the dual2use inputs& is re3uired.
12.3 Ahere apportionment is re3uired the results must meet the t#o conditions of
use and range of activities. The method used must be supported by the
circumstances of the case. =nder the old apportionment rules a number of
financial institutions used the turnover method of apportionment in #hich the
leasing turnover #as included in the numerator and the denominator #hile
the interest element of the loans #as included in the denominator but the
capital element #as not. This obviously resulted in a higher input ratio.
=nder the ne# rules such a method may not be used. A suitable option may
be based on a variant of the turnover method based on interest flo#s or some
other method #hich compares li6e #ith li6e. Alternatively it can use a non2
turnover based method such as number of staff& number of transactions& etc.
provided that method is supported by ob4ective documentary evidence such
as time sheets& diaries& etc. and that the result of the method meets the
conditions of the legislation.
12.4 An integral part of the financial services sector is that of stoc6ing loans.
$toc6ing loans are a common feature of a number of sectors& e.g.& the motor

trade& the agricultural sector& etc. Traditionally these loans #ere normal
exempt financial services& but in some cases& usually for security of title
reasons& these loans are no# treated as t#o supplies 2
the supply of the goods (usually at cost price& and
the granting of exempt credit.
Again any VAT #holly attributable to the former is fully deductible and any
VAT #holly attributable to the latter is not. 7o#ever& it is clear that the
inclusion of the former in the taxable turnover for purposes of the turnover
method #ould considerably distort the result. +evenue #ill not accept the
standard turnover method to apportion VAT on dual2use inputs in these type
of cases.
12.5 A considerable number of suppliers of goods also operate various credit sale
schemes such as hire purchase& in2house store cards& etc. Ahere these
financial services are operated on an on2going basis& apportionment of VAT
on dual2use inputs should arise.

13. NON-TAXABLE ACTIVITIES 8 6RANTS7 SUBSIDIES AND
DIVIDENDS
.
13.1 VAT inputs are deductible on the purchase& ac3uisition or importation of
goods or services #hich directly relate to deductible outputs& i.e. taxable
supplies and 3ualifying activities. ,f the inputs relate solely to deductible
outputs then the VAT is fully deductible& if not it must be apportioned. ,n most
cases #here apportionment arises& it is because a business ma6es both
taxableB3ualifying supplies and exempt supplies K a partially taxable&
partially exempt business. 7o#ever this section deals #ith businesses #hich
are partially taxable and partially outside the scope of VAT.
13.2 The term 8outside the scope of VAT9 refers to activities #hich are neither
taxable nor exempt. ,n $ixth ?irective terms it means an activity #hich is not
an economic activity for VAT purposes. The ma4or categories of 8outside the
scope9 activities are those of public bodies and the holding of shares (but not
the trading of shares.
13.3 ,f a taxable person engages in both a taxable activity and an 8outside the
scope9 activity& VAT is deductible only in respect of the inputs #hich relate to
the taxable activity. ,nputs #hich are not solely attributable to either the
taxable activity or outside the scope activity are dual2use inputs for the
purposes of section 12(( and the Apportionment +egulations. Also #here
funding is given in the form of subsidies directly lin6ed to the price of the
taxable supplies& it constitutes consideration for supplies in its o#n right and
is taxable as such. Apportionment does not apply in those cases.
13.4 A taxable person #ho engages in outside the scope activities #ill usually be
in receipt of some form of funding to support the activity. ,f it is a regulatory
or statutory activity this #ill often be in the nature of some type of grant or
subsidy. The individual circumstances underlying the purpose of the grant&
the terms and conditions applicable and the nature of the activity carried out
#ill determine #hether an outside the scope of VAT activity is involved and
#hether or not the issue of apportionment arises.
13.5 Apportionment #ill arise only if inputs are being used for both deductible and
non2deductible activities. Therefore& for example& #here a taxable entity
carries out a statutory activity on behalf of the $tate in addition to its taxable
activities& apportionment of dual2use inputs is re3uired. 7o#ever if& for
example& a pharmaceutical company receives grant aid to support a research
and development pro4ect& the receipt of the grant #ould not result in
apportionment if it amounts only to the funding of a pro4ect #hich is directly
attributable to its taxable supplies.
13.6 ,n 6eeping #ith the fundamental legislative provisions& the legislation
governing this area re3uires a taxable person to calculate the tax2deductible
proportion #hich correctly reflects the use to #hich the dual2 use inputs are
put and #hich has due regard to the range of the taxable person9s activities.
,f apportionment is re3uired then any method may be used provided it meets
the re3uirements of the la#. The taxable person must be able to
demonstrate& to the satisfaction of the 1ommissioners& by means of
documentary evidence& that the method used meets the re3uirements of
the la#. Ahere a taxable person is in receipt of funding relating to an outside
the scope activity& the level of such activity is often proportionate to the level
of the funding and accordingly a turnover based method might best reflect the
use to #hich dual use inputs are put.

13.7 Therefore& in relation to apportionment and funding& be it public or private&
national or international& the 6ey issue is #hether the funding is in relation to
a taxable activity or a non2taxable activity. Apportionment under $ection
12(( can arise only if both activities are carried out.
13.8 The <uropean 1ourt of Custice has ruled in a number of cases e.g. Dolysar
7oldings& that the holding of shares is not an economic activity for VAT
purposes and that the receipt of dividends is not consideration for the
purposes of VAT. As a result& the 1ourt has held that dividends should not be
included in the denominator in the standard turnover method of
apportionment as provided for in Article 19.1 of the $ixth VAT ?irective. ,n
effect& the <1C vie#ed the holding of shares by a taxable person as the
personal investment portfolio of the taxable person& be that taxable person an
individual or a company& and not part of the economic activity of the taxable
person.
13.4 This decision of the 1ourt has been incorrectly interpreted to mean that&
since the 1ourt found that dividend income should not be included in the
denominator& the apportionment of VAT on inputs #hich relate to the
economic activity of the business and also to the personal investment
portfolio is not re3uired. T9&: &: &$!"**)!%. VAT is deductible only on inputs
#hich relate to taxable outputs. The <1C found that the standard Article 19.1
turnover method is not appropriate& not that apportionment itself is not
re3uired. As Advocate "eneral %ennelly in his >pinion on 1ase 121(2B99
%loridienne $A and Eerginvest $A V Eelgian $tate states:
1*. "he result of all this$ in so far as 2rticle .3(. of the 0ixth
4irective is concerned$ is not necessarily that the applicants may
deduct all of their 52" inputs. "o the extent that the national court
is satisfied$ notwithstanding the applicants contention to the
contrary$ that a not entirely insignificant proportion of those inputs
relates to the performance of non-taxable transactions connected
with the shareholding and lending activities of the applicants$ no
right to deduct may arise pursuant to 2rticle .6(7 of the 0ixth
4irective. 2 taxable person may only deduct that proportion of its
inputs which may properly be assigned to its economic activities.
Every taxable person is obliged by 2rticle 77(7 of the 0ixth
4irective to 89eep accounts in sufficient detail to permit application
of the value added tax and inspection by the tax authority$ while
2rticle 77(4 re,uires 8every taxable person to 8submit a return
within an interval to be determined by each :ember 0tate$ which
8may not exceed two months following the end of each tax period$
whose duration is$ sub;ect to a maximum of a year$ to be
determined by each :ember 0tate$ although it may not 8exceed a
year. "he taxable person who see9s to exercise the right to
deduct in circumstances where some of its 52" inputs may relate
to non-taxable activities is obliged to establish$ to the satisfaction
of the relevant tax authorities$ the proportion of those inputs which
it claims are attributable to taxable transactions and thus capable
of being deducted.
13. 2rticle .3(. of the 0ixth 4irective is$ however$ inapplicable. #t
can apply only in cases where taxable but exempt activities are
mixed with taxable ones$ since$ otherwise$ as in the case where
the applicants engage$ in my opinion$ in taxable and non-taxable
activities$ there is no difference between the numerator and the
denominator of the fraction which that provision envisages. #t is
therefore for the national court$ in the final instance$ to determine
the extent to which some of the deductible 52" inputs claimed by
the applicants may in fact have related to the exercise$
respectively$ of its non-taxable shareholding activities and its intra-
group lending activities and to exclude those inputs from the right
of deduction claimed by them.
PRIVATE USE OF DUAL-USE INPUTS7 SELF SUPPLIES AND
APPORTION/ENT
14.1 ,f goods are purchased& ac3uired or imported for the purpose of both a
taxable activity and for private purposes then these goods are dual2use
inputs and VAT should be apportioned in accordance #ith section 12(( and
the Apportionment +egulations. This can best be illustrated by an example:
Example .4(a
A taxable person purchases holiday accommodation #hich he intends letting
through a letting agency for ten months of the year and #hich he intends
using himself for the other t#o months of the year. The property costs
F2''&''' plus F2.&''' VAT (for simplicity #e have ignored fitting costs&
professional fees& etc.. As the intention is to have a standard rental charge
apportionment is calculated on a time based calculation as follo#s:
1' x 1'' I 83.33
12
The apportionment ratio is 83.33 resulting in an initial deduction of F2.&''' x
5).)@ I F2'&52.. This deduction is sub4ect to revie# at the year end #hich
may lead to an ad4ustment of the initial deduction.

15. EN;UIRIES
15.1 This guide sets out the rules and regulations in relation to the apportionment
of input VAT. Any 3ueries in relation to the practical application of the
apportionment rules should be made to the taxable person9s appropriate
+evenue office.
A list of useful addresses& telephone& fax numbers and e2mail addresses can
be found here.