UK First-tier Tribunal has approved the proposed input tax attribution method for a taxpayer who provided exempt supplies of insurance as a small proportion of its business activities.

Lok'nStore operates self-storage facilities from which it provides self-storage services. It grants licences to store goods in its facilities, and hires vans and products relating to storage (such as boxes, bubble wrap and tape) to customers.

It also provides customers with insurance for their goods, fixed at GBP1 per week per GBP1,000 worth of goods insured. Insurance agreements are concluded in the reception areas of its storage facilities and represent, over a seven-year period, between 4 percent and 7 percent of total turnover.

For businesses making both taxable supplies (such as Lok'nStore's main activity of storage) and exempt supplies (such as insurance), UK VAT legislation (regulation 101 of the Value Added Tax Regulations 1995) provides that VAT on residual/overhead costs is deductible in the proportion which the total value of taxable supplies bears to the value of all supplies made in that period (the standard method).

Taxpayers may request the use of a method other than the standard method, but in order for HMRC to approve the request, the taxpayer must declare that the alternative method fairly and reasonably represents the extent to which goods or services are used or will be used in making taxable supplies.

Lok'nStore proposed a method that used floor space as the proxy for VAT-bearing costs, together with a turnover element for the reception areas. Under this method, overhead costs (which in this case were costs associated with the construction, maintenance and operation of the facilities) were attributed to taxable supplies in the proportion which taxable floor space bore to total floor space. This method entitled Lok'nStore to deduct 99.98 percent of VAT incurred, attributing only 0.02 percent of income to insurance.

Applying previous authorities, the Tribunal determined that there was a direct and immediate link between overhead costs and the taxable activities of Lok'nStore. Having regard to economic rather than physical use (SKF), it also noted that the price of insurance was set on the basis of what Lok'nStore's competitors charged, rather than in response to any costs relating to the construction, maintenance and operation of the facilities. The fact that a supply generates a large turnover or profit does not, by itself, indicate that the activity uses a high level of overheads.

The Tribunal noted that Lok'nStore "uses the goods and services supplied to it in connection with the construction, maintenance and operation of its stores almost exclusively for the purpose of making supplies of storage" and only to a very small extent for the purpose of making exempt supplies of insurance. The Tribunal therefore approved the use of the method proposed by Lok'nStore on the basis that it better reflected the economic use of the overheads by Lok'nStore and was a more accurate proxy than the standard method.