Retrospective application of apportioning a mixed supply

The taxpayer sells caravans at both 0% and 5% VAT; the sales include removable contents that are standard rated. Sales to customers are therefore treated as a mixed supply for VAT purposes.

Until March 2022 the company calculated output tax payable on each sale by using the ‘cost ratio method’ based on the purchase invoice(s) received from the manufacturer. For example if it bought a caravan for £10 000 of which £2 000 was allocated to removable contents on the supplier invoice the same 20% percentage would be applied on the onward sale to the final customer.

The taxpayer appointed an experienced expert to carry out a specialised exercise and it was established that 5% to 9% was a fairer percentage to reflect the market value of the removable items compared with 16% to 27% declared by the company on its past returns. This...