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Help with VAT apportionment of consideration — GfC2

Updated 29 April 2024

Guidelines for Compliance — purpose and scope

These guidelines on apportionment of consideration are for businesses that sell any goods or services with different VAT liabilities for a single price as part of a package or bundle.

They:

• outline HMRC’s recommended approach for how to apportion the consideration (amount paid) when any goods or services with different VAT liabilities are supplied together for a single price

• help businesses understand approches we see as increasing or lowering tax compliance risk

We talk about tax compliance risk as ‘risk’ throughout these guidelines. Lowering tax compliance risk reduces the risk of error to help businesses get taxes right first time.

These guidelines are for bundles of more than one supply. They are not appropriate where there is a single supply with different elements. Further guidance on single and multiple supplies can be found in HMRC manual VATSC11100.

Background

The guidelines focus on selling price and cost-based apportionment methods, as these are the most common approaches. However, we accept that other apportionment methods may also be appropriate in specific circumstances.

The guidelines are intended to support the apportionment of bundled supplies of any goods or services where all of these apply:

• more than one supply
• for a single consideration
• more than one VAT liability

For further guidance on whether an apportionment is appropriate read HMRC manual VATVAL03200.

Where a single monetary payment is the consideration (amount paid) for two or more supplies of different VAT liabilities, a business is required to allocate a fair proportion of the total payment to each of the supplies. This requirement is contained in VAT Act 1994, Section 19(4).

‘Where a supply of any goods or services is not the only matter to which a consideration in money relates, the supply shall be deemed to be for such part of the consideration as is properly attributable to it.’

Although Section 19(4) requires an apportionment of the consideration to be performed, it does not prescribe the methods by which this is to be achieved.

The most common methods are based upon the selling prices of the supplies or the costs incurred in making the supplies. This Guideline for Compliance sets out HMRC’s view on tax compliance risk in relation to which of those methods will produce a fair and reasonable result in different circumstances.

A fair and reasonable method produces an outcome which fairly reflects the proportion of the price attributable to each supply within the bundle and is a method which is relatively simple for a business to operate and for HMRC to check.

HMRC considers that the recommendations in the guidelines are mainly applicable to retail sector supplies from VAT registered businesses to non-VAT registered customers.

Other sectors such as charities and non-profit organisations may find aspects of the guidelines useful, however there may be further sector specific rules and appropriate guidance that would need to be considered beyond these recommendations. Find out How VAT affects charities (VAT Notice 701/1).

Guidelines for Compliance — recommended approach

We have found varied approaches to apportioning the VAT due on bundles with a number of these approaches not reflecting our view of fair and reasonable.

Our recommended approach aims to help you understand our view of the tax compliance risk associated with different approaches and get taxes right first time.

Apportionment based on selling price

Where each item in a bundle of goods, services, or both, is also sold separately by the business, an apportionment based on the selling price of each item in the bundle is a low tax compliance risk approach.

We give some examples in HMRC manual VATVAL03800, where the selling prices provide the weighting used in the apportionment.

In situations where the bundle is sold for a discounted amount, we would expect the discount to be applied proportionally to the normal selling price of all the goods and services in the bundle. A business would be expected to evidence the normal selling price of each supply. The business’s normal selling price is the price they ‘charge’ for the item when they sell it separately.

We view this approach as minimising tax compliance risk for bundles such as meal deals where all items are also for sale individually.

Example of selling price apportionment

A retailer offers items for sale as part of a discounted meal deal, all of which are available for sale individually:

• cold takeaway sandwich — liable to VAT at the zero rate (ZR)

• plain cookie — liable to VAT at the zero rate (ZR)

• bottle of cola — liable to VAT at the standard rate (SR)

A single consideration is paid for the bundle of items and means the VAT should be properly apportioned between the items.

If purchased individually, the sandwich would cost £3, the cookie would cost £1, and the cola drink would cost £2 (VAT inclusive). The retailer offers the items for sale as a bundle for a total consideration of £4.

The proportion of the deal price is determined by looking at the prices the trader normally charges for the individual items.

Item (VAT Rate)	Individual item shelf price	Proportion total shelf price	Proportion deal price
Sandwich (ZR)	£3.00	3 ÷ 6 × 4	£2.00
Cookie (ZR)	£1.00	1 ÷ 6 × 4	£0.67
Cola drink (SR)	£2.00	2 ÷ 6 × 4	£1.33
Total	£6.00	—	£4.00

The appropriate VAT fraction can then be applied to the positive rated proportion of the deal price.

1. VAT inclusive proportion deal price of positively rated item x appropriate VAT fraction = VAT accountable on this bundle.

2. 1.33 × standard rate VAT fraction = VAT due.

Using the business’s ‘normal’ selling price, the discount will be applied proportionately to all goods within the deal and is viewed as lowering tax compliance risk.

Examples of approaches that increase tax compliance risk

These examples are some of the different arrangements which increase tax compliance risk when selling prices are used in apportionment methods.

Example 1

A method where the discount in the meal deal is mainly, or wholly attributed to one item within the bundle.

For example, a method where most or all of the discount in the meal deal bundle is attributed to the standard rated cola drink, so the calculated price of the sandwich and cookie are approximately the same as the individual sale price, is likely to increase risk.

It would increase risk further if an item in a bundle is attributed a price which exceeds the individual sale price.

Example 2

Where the individual sale price of an item in a bundle is set so high that it is unlikely a typical customer would choose to buy it separately, is likely to increase risk.

For example, where a sandwich, cookie, and cola drink can be purchased for a meal deal bundle price of £4, however the lower VAT-rated sandwich or cookie are for sale individually for an amount approaching, or in excess of, the £4 bundle price. While there may be a commercial explanation for this, the instance of it happening would increase risk.

Example 3

Where the normal selling price used within an apportionment calculation changes without evidence to support the business rationale for the change.

Price reductions for slow moving stock or reduced for quick sale because of expiry dates, may be acceptable and would not increase risk. Using such altered selling prices where a fair and reasonable rationale can be demonstrated, and sales of these individual supplies have been made for the selling price used may be acceptable.

Where a business changes the price of supplies for what may be entirely valid reasons but continues to use these prices beyond the period in which these supplies are available individually at those prices, is an approach that is likely to increase risk.

Example 4

Use of ‘open market value’ or Recommended Retail Price (RRP) rather than a business’s normal selling price.

Using the selling price generally used by other retailers rather than the actual price the item is individually sold for will increase risk. The aim is to apportion the VAT due on the bundle being sold by that business.

In the meal deal example, if the cola drink had an RRP of £1.50 but was never sold individually by that business for anything other than £2, by using £1.50 in the apportionment calculation this would reduce the proportion deal price for that item and the resulting VAT due on the bundle offered by that business.

Apportionment based on cost price

Where bundled goods or services, or both, are not all sold separately, it may be necessary to base the apportionment on the cost price of those goods or services. There is general guidance on this in HMRC manual VATVAL03900.

It is important when applying a cost-based apportionment to make sure that all ‘relevant’ costs are included. In straightforward cases it will be possible to identify the costs wholly attributable to the supplies within the bundle.

However, there may be cases where some costs cannot be wholly attributed to one specific item. These costs would include overheads, some of which are general overheads such as lighting, rental of premises, telephone bills, but some of which may directly relate to the processing or alteration of the supplies within the bundle such as running costs of machinery or staff.

Cost-based methods are likely to be applied in 2 sets of circumstances:

• where all costs can be identified for all supplies within the bundle
• where only some costs can be identified for some supplies within the bundle

Where all costs can be identified for all supplies within the bundle

These are generally applied in two sets of circumstances:

• without processing or alteration of the products in the bundle
• with processing or alteration of the products in the bundle

Without processing or alteration

Where goods, services, or both, are purchased and bundled without any further processing or alteration being made to the products themselves, any general overhead costs can normally be split in the same proportion as the directly attributable costs or can be ignored. This is because none of the overheads will directly relate to the production of the goods within the bundle.

Example 1

A business which sells seasonal hampers, where items are not sold individually and nothing is processed or altered by that business prior to being included within the bundle, could split the overhead costs in the same proportion as the directly attributable costs or ignore them. If the directly attributable costs resulted in 20% being attributed to zero-rated supplies and 80% to standard-rated supplies, the ‘general costs’ such as, packaging, staff, storage, could be allocated in the same ratio or may be ignored.

Whichever option is used, the result will normally be the same, as the end-values being apportioned are being determined solely by the directly attributable costs.

It should be noted that this example is not attempting to state HMRC policy in relation to single or multiple supplies.

Significant costs

Where certain overhead costs do directly relate to the maintaining or storage of a particular supply within such a bundle, and these overheads are a significant cost, it may be appropriate to consider them in line with the approach where there is processing or alteration of supplies.

This may be the case in the seasonal hamper example if significant costs are required to refrigerate chilled items that are part of the bundle, where the other items have no similar costs.

With processing or alteration

Apportionment methods can be complicated where supplies are bundled together, not sold individually, and where some or all of the supplies within the bundle are processed or altered. We see several tax compliance risks with methods in these cases, especially linked to the attribution of overhead costs.

Where some or all supplies within the bundle are purchased and then processed in some way before being bundled, it would increase risk if the costs of processing the supplies are ignored or apportioned in line with directly attributable costs as this may not reflect the use of the processing costs.

This is particularly relevant where significantly more of the overhead costs are used in the production of some supplies in a bundle compared to others.

This can be difficult to identify when the costs of processing the item includes costs such as fuel or staff, which are often considered to be general overheads, but which are partly attributable to the processing of supplies in the bundle.

To reduce tax compliance risk:

• overhead costs should be apportioned to the relevant supplies, particularly where significantly more overhead costs are used for some supplies than others

• attributing these types of costs should be done to the fullest possible extent and to the correct supply

• all of the supplies made, and all of the costs incurred should be taken into account

• evidence should be maintained that the basis for the attribution is fair and reasonable

Where the business considers that apportioning these costs in such a way would not affect the final valuation, they would need to evidence this, as it is likely to increase risk.

Examples of approaches that increase tax compliance risk

We see these examples as some of the arrangements which increase tax compliance risk in cost-based apportionments where all costs can be identified.

Example 1

Where all costs can be identified, and some processing takes place, but the cost of processing is not taken into account.

For example, a takeaway sells mainly standard rated hot food which it prepares and cooks on site, but also sells cold zero-rated items that they purchase for resale without processing as part of a bundle. Significantly more of the costs of staff and fuel incurred by the takeaway will be used in the preparation and cooking of the hot food compared to overhead costs related to the cold food.

Ignoring the staff and fuel overhead costs of producing the hot food, or apportioning them in line with costs wholly related to particular elements of the bundle, like the basic ingredients, may not produce a fair and reasonable outcome.

Example 2

Where the cost attributed to the lowest VAT-rated item within the bundle is greater than the consideration a customer is likely to pay for that item individually.

For example, a milkshake is sold for £1.50 normally, but when included in a deal, the amount of costs allocated to the milkshake is £1.75. While there may be a commercial explanation for this, the instance of it happening would increase risk that the apportionment method is not allocating all the relevant costs correctly.

Example 3

Where attribution of costs is not done to the fullest extent for all costs and significantly more costs are included in the attribution for the lower VAT-rated item than the higher VAT-rated item.

For example, a consumer purchases a child’s package to access standard rated leisure facilities and hire of zero-rated children’s footwear, which in this instance, is considered a bundled multiple supply. Where the costs could be identified, it would increase risk if every possible cost was allocated to the purchase, cleaning, storing, maintaining of the children’s footwear available for hire, but the same examination was not given to the standard rated element of the supply which is accessing the leisure facilities.

It should be noted that this example is not attempting to state HMRC policy in relation to single or multiple supplies and is only attempting to highlight the importance of fairness in relation to attribution of costs.

Where only some costs can be identified for some supplies within the bundle

Apportionment methods can be complicated where you can only identify the costs for one item within the bundle. In such circumstances, often the most practical approach is to mark-up the identified costs and deduct them from the remaining selling price of the bundle to ascertain the value of the other supplies.

There is some general guidance in HMRC manual VATVAL04000.

In such circumstances businesses looking to reduce risk should consider:

• the mark-up applied to the supply must not be unreasonably high or low — businesses should consider such things as uplifts applied to similar goods or services, overall profits of the business, trade norms or RRP’s

• the cost element of supplies not sold in a bundle should be excluded from the apportionment calculation

• any profit element should be fairly allocated to all of the supplies within the bundle — it would increase risk to consider that the profits generated in the bundle are mostly or all from the item which the lower VAT liability applies to

Where all the costs can be identified for all the supplies in question it would be inappropriate to use this method.

Where the supplies within the bundle are all sold separately by the business, we recommend a selling price apportionment method.

Examples of approaches that increase tax compliance risk

We see these examples as some of the arrangements which increase tax compliance risk in cost-based apportionments where only some costs can be identified.

Example 1

Where the uplift applied to the element with the known costs is unreasonably high or low.

For example, where the element with the known costs is the higher VAT-rated item and no, or very little, mark-up is applied to that item, this would result in any profit in the bundle being mostly from the lower VAT-rated item, which would increase risk.

In the example where a consumer purchases a child’s package to access leisure facilities and hire children’s footwear, it may be that the circumstances mean the business is unable to identify the costs of providing access to the leisure facilities.

In such a situation, the business may need to consider uplifting the known costs associated to the hire of children’s footwear. If the children’s footwear hire costs were identified and an unreasonable uplift was then applied to that cost to determine the proportion of the bundle price, that would increase risk.

A business should consider indicators such as its overall profit, mark-ups for similar supplies or RRP’s to determine a reasonable uplift.

For example, if the business hires adult footwear at a 20% profit, but considers that hiring children’s footwear generates a 50% uplift when apportioned in the bundle, that is likely to increase risk.

Example 2

Where all costs for supplies are included in the apportionment calculation, but not all supplies are sold in a bundle.

For example, it would increase risk to include 100% of the printing costs for a book where only 80% of the books are sold in bundles. The requirement is to establish the value of the supplies that have actually been sold in a bundle, rather than the costs consumed. Input tax would already be claimable on costs, subject to the normal rules.

Documents and evidence to be retained

Businesses should maintain appropriate documentation to support the method applied.

Without supporting documentation HMRC may not agree it is fair and reasonable.

Some examples of appropriate documentation are:

• a fully evidenced analysis of the method being applied and why it produces a fair and reasonable result

• where a cost-based method is used, clear analysis of the costs included, how they have been allocated to the relevant supplies, and an explanation of any excluded costs and the rationale

• invoices or product files that evidence the values used in the method applied

• where the bundled supplies are all sold separately, calculations showing why the selling price method did not produce a fair and reasonable result would be helpful to retain, if a cost-based method is used

The list is not exhaustive.

General guidance on basic record keeping and accounting requirements that a business is expected to comply with is in the VAT Traders’ Records Manual and in VAT Notice 700/21.

Bespoke Retail Scheme Agreements

It is anticipated that the methods outlined in these guidelines will also assist businesses to meet the requirements of the Bespoke Retail Scheme Agreement (BRSA) where applicable. VAT Notice 727/2 provides further information on bespoke retail scheme agreements. It sets out the details that should be included in relation to ‘mixed rate products’ and action to take.

Specify how products will be coded and how tax due will be calculated, including composite supplies of different rated products where supplied as a single package, for example, meal deals.

Following the recommendations outlined in these guidelines will generally lower tax compliance risk in relation to bundled supplies and any applicable BRSA requirements.

Next steps

It is anticipated that VAT registered businesses will use these guidelines to inform approaches for applying a fair and reasonable apportionment method when calculating the VAT due on bundled supplies.

Businesses who apply the recommendations and can evidence this will lower their risk of arriving at an inappropriate apportionment of consideration and HMRC challenging the method used.

What to do if you’ve made a mistake

If you read these guidelines and determine that you should correct a submitted return in relation to this issue, follow the error correction notice process outlined in VAT Notice 700/45.

If you are notifying the correction using VAT652 form or the Government Gateway form, include the Guideline for Compliance reference number (GFC2/2023) in the ‘reason for error’ box.

Where customers fail to meet their obligations, they may be subject to:

• penalties
• interest
• both

If you think you may have failed to meet your obligations, read the HMRC compliance factsheets on penalties to find out about:

• penalties HMRC could use
• when these penalties may apply

Further questions

After reading these Guideline for Compliance if you have any further questions you can email us:

1. Make sure you include the Guideline for Compliance reference number in the subject line and if you have a Customer Compliance Manager then copy them into the email.

2. Send them to [email protected].

Sending information by email carries certain risks and HMRC will assume that by sending information by email you understand and accept these risks.

Legislation and guidance

The main sources of available guidance relating to the apportionment of consideration include:

• VAT Valuation Manual
• VAT Notice 700, section 31

The relevant legislation relating to the apportionment of consideration is within Section 19(4) of VAT Act 1994.