Please note that this article does not cover cars as the input tax on them is legally blocked.

If VAT is incurred on an expense which will be partly used for business and non-business activities, there are three alternatives:

1. Apportion the input tax between business and non-business use using a ‘fair and reasonable’ approach and reclaim the business element as input tax. Unlike partial exemption, the method of apportionment is not specified in the legislation;
   
2. Treat all of the VAT as input tax, recovering the non-business element, and account for output tax on the non-business use of the goods and services. This is referred to as Lennartz accounting after the ECJ case confirming the principle. However, its use is very restricted including not being available for land and buildings; or
   
3. Do not recover any input tax.
   

Fair and reasonable

This phrase occurs a lot in HMRC’s guidance and internal manuals but has no legal definition. As you can imagine, HMRC’s interpretation of what’s fair and reasonable to reclaim may not be the same as the taxpayer’s.

However, when a cost has both business and personal application (for example mobile phones) it’s always a good idea to restrict the VAT recovery to some extent to reflect the personal use. Depending on circumstances this can be as small as 10-15% of the VAT but is usually far easier to agree with a visiting HMRC officer than show that the phones are 100% business use to justify a 100% claim.

The same principle can be applied to other assets and costs that have a “mixed” use – for example utilities for the farmhouse. The attribution does not have to follow the guidance agreed between the NFU and HMRC (see our last edition) but if they are vastly different in your favour you will need to be able to demonstrate why that is.