How much VAT can you claim on mixed use assets?

Two options

A business which purchases an asset that will have both business and private use can deal with the VAT in two different ways:

Fully claim input tax - and then account for output tax on any private use in the future. You will make an output tax adjustment on each monthly or quarterly return. The calculation can be made by using any method that is fair and reasonable.

There is no de minimis limit with this method. In other words, you can still claim 100% input tax and account for output tax even if the business use of the asset is, say, 5%. This method gives a useful cash-flow benefit to your business compared to the alternative method.

You must account for output tax over the economic life of the asset, i.e. until it is either sold or scrapped.

Input tax apportionment - at the time of purchase, calculate what percentage will be used for business and claim this percentage as input tax when you enter the invoice into your accounting system. There is no need to account for output tax on private use because you have removed the private part of the asset from your business with the apportionment calculation.

This method is simpler because you don’t need to make quarterly output tax calculations on future returns.

With both methods, the business use of the asset must be partly or wholly linked to your taxable sales. If it is wholly linked to your exempt sales, there is no right to claim any input tax because of the partial exemption rules.

Excluded assets

The option of fully claiming input tax and accounting for output tax on future private use is not available for the purchase of your yacht because it falls within the list of excluded assets where input tax apportionment is the only permitted method:

• land and buildings - often referred to as “immovable property” in HMRC’s guidance
• ships, boats or other vessels
• aircraft.

Future sale of asset

If you adopt the input tax apportionment method, you will only account for VAT on the business percentage if you sell the asset in the future. However, output tax will be payable on the full selling price if you claimed 100% input tax on the original purchase price.

Example. ABC Deliveries purchased a motorbike in 2018 and claimed 30% input tax for business use. It was sold in 2023 for £3,000. Output tax is calculated as follows:

£3,000 x 30% = £900 including VAT, i.e. output tax is £900 x 1/6 = £150.

Non-business v private use

The method of claiming 100% input tax and accounting for future private use is only available for an asset that has some private and some business use. If the assets are used for non-business and business purposes, which is common with charities and not-for-profit organisations, then input tax apportionment is the only method that can be used.