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Business/non business apportionments' when is an agreement not an agreement?

Two recent cases involving a University and a major charity dealt with disputes with HMRC over the methodology to be used for apportioning VAT between business and non business activities, and in particular, the scope for retrospectively changing an agreed method.

Unlike partial exemption or retail schemes, where the framework for agreeing bespoke agreements between taxpayer and HMRC is statutory, the legislation is silent on non-business apportionments. HMRC's consent is not required for the method chosen, although they will give their approval if requested. Frequently, such approval is subject to the requirement that the taxpayer must monitor whether the method continues to produce a 'fair and reasonable' result.

In Oxfam the charity sought to reclaim a proportion of the VAT on fees charged by professional fundraisers, following the Church of England Children's Society case. HMRC paid part of the claim, but resisted repaying the rest. The key issue was that the parties had agreed a business/non-business method in 2000, at a time when the activity of seeking donations was seen as non-business.

According to the strict letter of the Agreement, treating fundraising costs as general expenditure had a knock on effect and increased the overall proportion of VAT referable to business activities from some 75% to between 85% and 90%. HMRC contended that the increased general recovery rate was not 'fair and reasonable'- the charity did not produce evidence that c.90% was fair and reasonable, but sought to rely upon the Agreement. The Tribunal refused its Appeal, holding that the 'Approved Method' did not constitute a binding agreement.

The University Court of the University Of Dundee had also agreed a method of calculation with HMRC in 2000. In 2004, a different HMRC Officer took the view that its calculations were flawed and sought to impose a new method of calculation by raising an Assessment. The Tribunal was very critical of the Officer's behaviour, and rejected the Assessment, finding that the Officer had closed his mind to anything other than that which he thought produced the best result for the Revenue.

In both the above cases, the party seeking to re-open past VAT claims was unable to show that it would be “fair and reasonable to do so. Whether Oxfam might have success via Judicial Review is not clear at the time of writing.

So, what is the scope for retrospective adjustments? HMRC's position is that if previous calculations did not produce a fair and reasonable result a taxpayer may request a retrospective change. Their published guidance is silent on whether a taxpayer can be compelled to re-calculate apportionments if, in HMRC's view, a previously agreed method no longer produces a result that is fair to the Revenue.

Based upon Oxfam, the conclusion must be that HMRC will not be bound by agreement to a method that produces an “unfair and unreasonable” result. However, the act of changing a method may also be unfair-negotiations can be time consuming and resource intensive, and a taxpayer needs to be able to budget with a degree of certainty.

Even the University of Dundee Officer accepted that he should not disturb the calculations for previous years, and the Tribunal disapproved of his decision to withdraw HMRC's agreement to the existing method 10 months into the then current year.

The Appellant was legitimately and reasonably operating and expecting on the cost coding and budgeting arrangements which applied from the beginning of that tax year and conducting its affairs accordingly.


A charity should regularly review whether its calculations produce a fair result, particularly if activities change or there are changes in the way they are structured. The facts and assumptions underlying a method and subsequent reviews should be well documented, since as time passes it is likely that the taxpayer and HMRC staff involved in the original negotiations will have moved on.

The charity will thereby be well-placed to negotiate changes to its method if necessary, or to resist changes proposed by HMRC if not.

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If you think you may be affected by this, and for more advice on intelligent VAT planning, please contact Julian Borley on 01865 261100 or email