When you run a small business in the UK and occupy premises that are used for both VATable activities and exempt activities, the question of reclaiming input VAT on shared premises is one I see a lot. It’s fiddly, but perfectly manageable if you follow the right steps and keep good records. Here I’ll walk you through the core rules, the practical apportionment approaches I use with clients, the de minimis test, and when it’s worth applying for a special method from HMRC.
Why this matters
If part of your premises is used to make taxable supplies (where you charge VAT) and part is used for exempt supplies (where you cannot charge VAT), you can only recover the input VAT that relates to the taxable use. Get this wrong and you either overclaim (risking penalties and interest) or underclaim (losing cash you’re entitled to). I’ve helped retailers who rent rooms to exempt services, charities that operate mixed activities, and landlords who let to both VATable trades and exempt users — the principles are the same.
Start by deciding what’s business and what’s non-business
Before apportioning anything, make sure the supply in question is a business activity for VAT purposes. Not every use of premises by a business is a business supply: consider whether something is a non-business activity (e.g. private use by the owner). Only input tax attributable to business activities is potentially recoverable.
Direct attribution where you can
The first rule is to assign input tax directly where possible. If a cost clearly relates only to the taxable part of the premises (for example, a new storefront window installed solely on the trading area), recover all of that VAT. Likewise, if a cost exclusively serves the exempt activity (e.g. fittings only used in an exempt clinic room), you cannot reclaim that VAT.
When you need to apportion
Most common situations involve shared costs: utilities, insurance, rent for a single building used partly for taxable sales and partly for exempt services, refurbishment of common areas, and so on. For these you must split the input VAT between the taxable business use and the exempt business use.
There are two main, acceptable ways to do this practically:
- Simple use-based apportionment — apportion by a sensible driver such as floor area, headcount, operating hours, or customer footfall. For premises split into clearly separate rooms, floor area is usually the fairest and easiest method.
- Value-based apportionment — apportion by the relative value of the outputs (taxable turnover vs exempt turnover) when that better reflects how the inputs are used.
Which one you choose should reflect how the premises are actually used. HMRC allows “fair and reasonable” apportionments — the key is to be able to explain and evidence your method.
The de minimis rule — when you can reclaim everything
The partial exemption de minimis rule is an important relief for small mixed suppliers. If the total input tax attributable to making exempt supplies in a year is less than £7,500 and also less than 5% of your total input tax for the same period, you can recover all input tax (you don’t have to do a partial exemption calculation).
Example table (simplified):
| Item | Amount |
|---|---|
| Total input VAT | £40,000 |
| Input VAT attributable to exempt supplies | £1,500 |
| Is exempt input VAT < £7,500? | Yes |
| Is exempt input VAT < 5% of total input VAT? | 1,500 / 40,000 = 3.75% → Yes |
| Result | All input VAT recoverable |
If you meet both conditions, you can keep recovering full VAT on purchases for the period covered. If you don’t meet the de minimis test, proceed to the standard partial exemption calculation.
Standard partial exemption calculation
Under the standard method you:
- Identify input tax clearly attributable to taxable supplies (recoverable) and to exempt supplies (not recoverable).
- Apportion the remaining “residual” input tax between taxable and exempt use using an appropriate metric (often the ratio of taxable turnover to total turnover, or floor area).
- Apply the resulting recovery percentage to the residual input tax.
Keep a worked example in your records. If your apportionment is based on turnover, show turnover figures and how you attributed inputs. If it’s on area, show measurements or a floorplan.
When you might need a special method
Some businesses have mixed use that’s complex or where the timing of usage changes. If the standard method doesn’t produce a fair result, you can apply to HMRC for a partial exemption special method. I’ve successfully helped clients with co-working spaces and community centres obtain special methods that better matched reality — for example, apportioning certain building running costs by room bookings data rather than simple area.
To get a special method approved you need to submit a clear proposal, include historic figures to support it, and be prepared for HMRC to ask for adjustments or monitoring periods. Special methods are binding once agreed and usually last for several years.
Capital items and later adjustments
Large capital items (for example, a major refurbishment or a central heating system) often need careful treatment. If the use of the capital item changes over time, or the initial apportionment was approximate, you may need to adjust input VAT subsequently. Also be aware of the capital goods scheme for high-value items (usually above £250,000) — that has its own apportionment and adjustment rules over several years.
Practical tips and record keeping
- Keep evidence for your apportionment — floorplans, meter readings, timetables, turnover split, room booking logs, or staff allocation records.
- Document the method — write a simple note explaining why you chose a particular basis and keep it with your VAT records.
- Review annually — circumstances change. Revisit your apportionment at least once a year and when there are significant changes to how the premises are used.
- Software can help — Xero, QuickBooks and Sage don’t do partial exemption automatically, but you can export figures and keep supporting schedules; for complex cases consider specialist VAT or accounting software or a spreadsheet template.
- Ask early about special methods — if you think a special method will be needed, start the conversation with HMRC early and keep evidence ready.
Common pitfalls I see
- Assuming floor area is always best — sometimes turnover or hours of use better reflect consumption of inputs.
- Failing to separate private use from business use — inputs used privately are non-business and not recoverable.
- Missing the de minimis calculation — small businesses often qualify and miss easy recovery.
- Poor records — you should be able to justify the method used if HMRC asks.
If you’d like, I can prepare a short checklist or spreadsheet template showing how to do a simple floor-area apportionment for premises — tell me your premises layout and the main exempt activity and I’ll sketch the steps you need to take. This is the sort of practical paperwork that saves time if HMRC ever queries a reclaim.
