VAT Apportionment: the Pro Rata Method with Taxable and Exempt Supplies

When apportionment is needed

The right to offset arises when goods (services) are used in activity whose supplies are subject to tax, including at the zero rate (Art. 266, part 1, item 1). So zero-rated exports count as taxable supplies for apportionment, not as exempt ones.

Tax must be allocated when exempt supplies exist alongside taxable ones: for example, certain financial, insurance, medical or educational services, or sales of exempt goods. If a company has no exempt supplies, apportionment does not arise.

The separate method

Under the separate method, the taxpayer keeps separate records of purchased goods (services) and the VAT paid on them, used for taxable and for exempt supplies (Art. 268). VAT on purchases for taxable activity is offset in full; VAT on purchases for exempt activity is not offset and is included in cost.

For general costs that cannot be attributed to one activity (office rent, utilities, communications, administrative expenses), the split is made by the pro rata method. In practice, the separate method is almost always combined with a ratio for overheads.

• separate sub-accounts or analytics in VAT accounts for taxable, exempt and general purchases;
• stating in the purchase request or contract which activity the goods are bought for;
• setting the method and allocation rules in the accounting policy.

The pro rata method

Under the pro rata method, the VAT to be offset is determined by the share of taxable supplies in total sales of goods (services) excluding VAT, calculated on a cumulative basis over the current calendar year (Art. 268).

VAT not offset under the pro rata method is treated as an expense deductible for profit tax. So the non-offset part is not lost entirely — it reduces taxable profit.

An illustrative calculation

Since the start of the year a company has sold goods and services for 1,000 units excluding VAT, of which taxable supplies are 800 and exempt supplies 200. The taxable share is 80%. Input VAT on general expenses for the period is 50 units.

80% of 50, i.e. 40 units, is offset. The remaining 10 units are not offset and are included in expenses deductible for profit tax. Because the share is calculated cumulatively from the start of the year, it is recalculated in each following period on the accumulated data.

The five percent rule

If in the current tax period the share of taxable supplies does not exceed 5% of total turnover, the taxpayer may include in full in the cost of purchased goods (services), including long-term assets, the VAT on goods actually received (Art. 268). This is a simplification for companies whose activity is almost entirely exempt: instead of calculating a ratio, all input VAT is included in cost.

Adjusting VAT already offset

If goods were bought for taxable activity and the VAT was offset, but they are then used for an exempt supply, the VAT previously offset must be adjusted (Art. 269, part 1, item 1). The adjustment is made in the tax period in which the circumstances arise.

For fixed assets, real estate and intangible assets, the amount restored is proportional to their residual (carrying) value without revaluation (Arts. 269, 270). If an asset is used for both taxable and exempt activity, part of the tax is restored in proportion to the share of exempt supplies. Assets that are fully depreciated or were put into operation more than 10 years ago are not adjusted (Art. 270).

Documents and accounting policy

In a desk audit and when reviewing a VAT refund application, the tax authority checks not only e-invoices but also how the tax has been allocated between activities. So the chosen method and the share calculation must be reproducible from the accounting data.

• an accounting policy clause: which method applies, which costs are general, how taxable and exempt turnover are determined;
• a monthly cumulative calculation of the taxable share from the start of the year;
• an input VAT register split into taxable, exempt and general purchases;
• calculations of adjustments under Arts. 269 and 270 when the use of goods or fixed assets changes;
• a reconciliation of non-offset VAT with expenses in the profit tax calculation.

Common mistakes

• including zero-rated exports in exempt supplies and understating the offset share;
• calculating the ratio month by month instead of cumulatively from the start of the year;
• offsetting all VAT on general expenses in full despite exempt supplies;
• not restoring VAT on goods and fixed assets moved to exempt activity;
• not including non-offset VAT in expenses deductible for profit tax;
• not setting the allocation method in the accounting policy.