Non-business use - accounting for the right amount of VAT

Non-business use - accounting for the right amount of VAT

Occasionally, you buy goods or services for your business which you also use for private purposes. When must you adjust your VAT return to account for this and how's it done?

Private use - not "all-or-nothing"

Infamously, the direct tax rules don't permit a tax deduction for expenses which have simultaneous use for both business and non-business purpose. This is called the "wholly and exclusively" rule. The rules for VAT differ. There is an equivalent wholly and exclusively rule, meaning that a business can reclaim VAT on a purchase even if there's a non-business aspect. How much can be claimed depends on the type of goods or services purchased and the proportion of business use.

One-off day-to-day purchases

If you buy goods or services for your business such as stationery supplies and other consumables, you should limit the amount of VAT you reclaim by the amount of private use. For example, if you buy a stack of printer paper and you say 20% of it for personal use, you should limit the amount of VAT you reclaim to 80% of the amount paid.

Alternatively, if the item purchased is something that you know you'll use for private purposes over time or, it's something for which you didn't anticipate any private use, you can reclaim all the VAT and then account for the private use proportion in the corresponding VAT return. This method also applies to so-called capital assets, e.g. equipment.

Continuous supplies of services

Where the purchase is of an ongoing service, e.g. a mobile phone bill (even if it's your personal mobile

phone) your business can reclaim the business use proportion of the VAT.

Tip. Your business is only entitled to claim a proportion of the VAT if it pays for the service or reimburses you for the business use proportion. Where you pay the bill for a service and your business reimburses you, you should provide it with the original bill/invoice as it will be needed for its VAT records.

Capital assets

If the purchase is a capital asset, broadly something that will be used many times, e.g. a computer or a van, your business can reclaim the business use proportion. There are different ways of doing this:

• by reclaiming all the VAT on the purchase and treating the private use as a supply of services on which output VAT is accounted for each subsequent VAT return; or

• claiming only the expected business use proportion of the VAT in the return for the period in which the purchase is made.

Accounting for output VAT.

Any method for working out the VAT on private use that results in a reasonable and fair result is acceptable to HMRC. In practice this will be either the Lennartz method or asset depreciation method.

Apportioning input VAT

This method involves estimating the business use proportion of the asset when you file the VAT return for the return period in which the purchase was made. Once you've made your decision on the amount to reclaim you cannot change the apportionment even if the amount of business use differs from your estimate.

There are two ways to account for VAT on private use of business assets. You can either restrict the amount of purchase VAT you reclaim by the estimated percentage of future private use, or you can reclaim all the purchase VAT and account for the value of private use for each subsequent VAT return.