The VAT standard method of apportioning output VAT is not mandatory – though the majority of businesses do use this method.
Any VAT registered trader can use “special method” that suits a business’ activities better. Any special method has to be “fair and reasonable” and it has to be agreed with HMRC in advance. When using a special method no rounding of the percentage is permitted and it has to be applied to two decimal places.
This is particularly so in the first years of trading when the business is incurring an unproportionable amount of exempt supplies which would reduce in future years.
Commonly used special methods include those based on staff numbers, floor space, purchases or transaction counts, or a combination of these or other methods.
However, even if a business uses a special method it will still have to undertake an annual adjustment calculation once a year using its agreed special method.