How does VAT work for mixed-use expenses?

Understanding “mixed-use” for VAT: the core idea

Mixed-use expenses are costs that serve both business and non-business (usually personal) purposes. VAT (Value Added Tax) can be reclaimed only to the extent that the cost is used for taxable business activities. In practice, mixed-use is where VAT gets less “plug-and-play” and more about evidence, methods, and consistency. Whether you are a sole trader, a partnership, or a limited company, the same fundamental principle applies: you should not recover VAT that relates to private consumption, and you should not recover VAT that relates to VAT-exempt activities where recovery is restricted.

Mixed-use comes up constantly in real life. A phone used for business calls and private calls. A home broadband contract used for client work and family streaming. A car used for customer visits and weekend trips. A building with a ground-floor shop and an upstairs flat. Even professional subscriptions and software licences can be mixed-use if they are partly personal or partly used for exempt business activities.

From a VAT perspective, the challenge is not simply identifying that a cost is mixed-use; it is deciding how much VAT you can reclaim and how you will prove that your approach is fair and reasonable. A good mixed-use VAT approach is not about squeezing the maximum claim. It is about establishing a method that (1) reflects reality, (2) can be evidenced, and (3) is applied consistently.

Input VAT and the “business purpose” test

The VAT you pay on purchases is called “input VAT.” The VAT you charge customers is “output VAT.” If you are VAT-registered, you typically offset input VAT against output VAT and pay (or reclaim) the difference.

Mixed-use issues generally arise when you want to reclaim input VAT on a purchase that is not 100% for your taxable business activities. Most VAT systems work on a “business purpose” basis: input VAT is recoverable only to the extent the costs are incurred for the purposes of the business and, more specifically, for taxable supplies rather than exempt supplies.

That distinction matters. Some mixed-use is “business vs personal,” and some mixed-use is “taxable vs exempt.” They can overlap. For example, a financial adviser who makes exempt supplies might have a phone used for exempt client work and for private use; even if the phone is used for business, VAT recovery may be limited because of exemption. So before you work out the split, you need to understand what kind of mixed-use you have.

Two different problems: private use vs partial exemption

It helps to separate mixed-use VAT into two buckets:

1) Business vs private (non-business) use. This is the classic “I use it personally too” scenario. The VAT rule is that you cannot reclaim the portion that relates to private use. In some cases you may reclaim all input VAT and then account for output VAT on the private use, but whether that is allowed and sensible depends on the category of expense and the local VAT rules.

2) Taxable vs exempt business use (partial exemption). If your business makes both taxable and exempt supplies, you may only recover input VAT to the extent it relates to taxable supplies. This is often called partial exemption. The methods can be more formal, sometimes with standard calculations and de minimis tests.

Businesses often encounter both issues simultaneously. For example, a property business might have taxable commercial rents and exempt residential rents, and it might also have directors who privately use certain assets. Your VAT treatment must handle both layers properly.

What counts as a mixed-use expense in practice?

Mixed-use can appear in places people don’t expect. The obvious examples are communications and vehicles, but there are plenty of others:

Home and premises costs: utilities, repairs, insurance, rent, service charges, and renovations where premises are partly used as a home and partly as an office or workshop.

Vehicles and travel: fuel, servicing, leasing, parking, tolls, and even hotel costs where there is an extended stay that includes leisure days.

Subscriptions and software: cloud services used for client work but also used to manage personal finances or personal projects.

Equipment and tools: a camera used for business shoots and personal family events, or a laptop used for invoicing and gaming.

Professional services: accountancy or legal advice that covers both the business and the owner’s personal affairs in one engagement.

Buildings and refurbishment: a renovation that improves a mixed-use property, such as a shop with a flat above, or a home office conversion that changes the nature of the property.

The key point is not the label on the invoice, but how the thing is actually used. VAT follows use, not intention alone.

Choosing a method to split VAT: the “fair and reasonable” approach

When an expense is mixed-use, you usually need to apportion input VAT. Tax authorities typically accept a range of methods as long as the method is fair, reasonable, and evidence-based. There is rarely a single “correct” percentage; instead, there is a defensible percentage.

Common apportionment bases include:

Time-based apportionment: Split based on time spent using the asset for business vs non-business. For example, a phone used 60% for business calls and 40% for personal calls based on itemised usage or sampling.

Usage-based apportionment: Split based on measurable use, such as mileage logs for vehicles or data usage for broadband if it can be evidenced.

Space-based apportionment: Split based on floor area used for business vs private use, often used for home office situations.

Transaction-based apportionment: Split based on number of transactions or users. For instance, a software licence used by both business staff and household members (rare but possible).

Turnover-based apportionment: Often used in partial exemption: input VAT is apportioned based on the ratio of taxable turnover to total turnover (taxable + exempt), although more refined methods can be used if turnover is not a good proxy for use.

Direct attribution where possible: If part of a cost is clearly business-only, you should directly attribute it rather than using a broad percentage split.

A good starting point is to ask: “What does this cost actually buy, and how is it actually consumed?” The apportionment method should follow that logic.

Consistency matters: don’t change methods just to chase a better result

Tax authorities often look for consistency. If you reclaim 70% of VAT on your phone this year and 95% next year without any real change in usage, it can look opportunistic. Consistency does not mean you can never update your method—businesses change—but it does mean you should be able to explain why the split changed. Perhaps you hired staff, took on more client work, or moved to a new pricing model that changed your activity mix. If there is a real-world reason, document it.

Consistency also means applying the same method across similar costs. If you split mobile phone VAT using time-based usage, but split broadband VAT using an arbitrary fixed percentage with no evidence, it can raise questions. The goal is not to overcomplicate things, but to have a coherent approach.

Evidence: what you need to keep and why it matters

VAT is often audited through documentation. For mixed-use expenses, you should assume that someone could ask, “Why did you claim that percentage?” Your answer needs to be supported by records.

Useful evidence includes:

Usage logs: mileage logs, call logs, appointment calendars, or device usage reports. You do not necessarily need to keep logs forever, but you should keep enough to justify your method.

Sampling: If detailed tracking is impractical, a representative sample period can be used. For example, a three-month sample of calls and data usage to establish an ongoing percentage, revisited annually.

Floor plans and measurements: For home office splits, evidence of the room size and how it is used.

Contracts and invoices: Showing what was purchased, who it was purchased by, and the VAT charged.

Written policy: A short internal note describing the method chosen for each mixed-use category and how it is reviewed.

The quality of evidence should match the scale and risk. A minor monthly phone bill does not need forensic analysis. A major property refurbishment does.

Example: mobile phone bills and VAT recovery

A mobile phone contract used by a business owner is a common mixed-use cost. Suppose the invoice is addressed to the business, includes VAT, and the phone is used for both client calls and personal calls.

One practical approach is to:

1) Review itemised billing for a representative month (or several months).

2) Categorise calls and usage as business or personal.

3) Calculate a percentage based on time, number of calls, or cost, depending on what the bill shows most reliably.

4) Apply that percentage consistently going forward, with periodic checks.

If your phone bill is mostly a fixed monthly charge, a time-based or call-count method may not perfectly reflect the cost structure. That’s okay—VAT apportionment is rarely perfect—so long as it is reasonable and you can justify why it reflects business use.

Also watch out for who the customer is on the invoice. If the contract is in a personal name, some tax authorities may be stricter about VAT recovery, even if the business pays it. The cleanest approach is to have business contracts in the business name where possible.

Example: home broadband and utilities

Home broadband is another classic mixed-use cost. Many people assume they can reclaim a big percentage because they “work from home.” The VAT approach should still be grounded in reality.

If the broadband is used for business work and personal use, you might use:

Time-based usage: A split based on working hours vs total household internet use time.

Data-based usage: A split based on business data usage vs total usage, if you can reliably measure it.

Practical proxy: A reasonable estimate supported by a sample or device-level usage reports.

Utilities like electricity and heating are trickier because measuring business vs personal consumption can be difficult. Space-based apportionment for a home office (square footage) combined with time (hours used) is a common proxy. For example, if a home office is 10% of the floor area and is used for business 40 hours a week, you could use a blended method. The point is not the exact formula; it is that the formula has logic and can be explained.

Example: cars, fuel, leasing, and private use

Vehicles can create some of the most complicated mixed-use VAT questions because private use can be substantial and because special rules may apply depending on whether the vehicle is a car, a van, or another type of vehicle, and whether it is purchased outright or leased.

For mixed-use vehicles, a mileage log is often the strongest evidence. A mileage log records business journeys (date, purpose, start and end mileage) and helps establish the business-use percentage. You can then apply that percentage to VAT on running costs, subject to local VAT restrictions.

Fuel can be particularly complex in some VAT systems because you may reclaim VAT on fuel used for business and then account for VAT on private fuel using a scale charge or a private-use adjustment. In other systems, you simply restrict input VAT to business use. Whichever approach applies, the heart of the matter is the same: you should not end up reclaiming VAT on private fuel consumption without accounting for it.

If you operate a company car for a director or employee with personal use, you should also consider whether any additional VAT accounting is required on the benefit provided. Even where income tax rules treat the benefit in a certain way, VAT may have its own lens on private consumption.

Example: mixed-use property and major works

Mixed-use property is where VAT can shift from “routine bookkeeping” to “strategic decision with long-term consequences.” Consider a building with a commercial unit on the ground floor and residential accommodation above. Repairs to the roof might benefit both parts. A refurbishment might include works that relate to the shop, the flat, and shared areas.

In such cases, a sensible approach is to:

1) Separate direct costs. Costs that relate solely to the commercial unit (e.g., shopfront works) are attributed to business use; costs solely for the flat are not recoverable (or may be restricted) depending on the VAT status of the residential element.

2) Apportion shared costs. Shared costs (e.g., roof, structural works, common stairwell) are apportioned using a logical basis such as floor area, expected use, or a cost-driver approach.

3) Consider taxable vs exempt activities. If the residential element is exempt letting and the commercial element is taxable letting, partial exemption rules may restrict VAT recovery even for business-related costs.

Property is also an area where elections or options (where available) can change the VAT character of income and therefore the recoverability of input VAT. Decisions around this are high impact and often require specialist advice, especially for large capital projects.

Direct attribution vs apportionment: always try to attribute first

A common error is applying a broad percentage to everything when some costs can be clearly attributed. If you can directly attribute an expense to business taxable activity, do so. Only apportion the remainder that is genuinely shared.

For example, if you buy a laptop exclusively for business and keep your personal device separate, that is direct attribution and makes VAT recovery straightforward. If you use one laptop for everything, you move into apportionment territory and you will need a method.

Direct attribution is often the simplest way to reduce VAT risk. The more you can separate business assets from personal assets, the cleaner your VAT position becomes.

When can you reclaim all the VAT and then “charge VAT back” for private use?

In some VAT systems and for certain categories of costs, it can be possible to recover all input VAT when an asset is acquired for business purposes, and then account for output VAT on the private use (sometimes called a self-supply or private-use charge). The idea is to treat private consumption as if the business supplied something to the owner or staff.

Whether this approach is available, and when it is beneficial, depends on the rules in your jurisdiction and the type of asset. Where it is allowed, it can sometimes simplify record-keeping because you recover VAT upfront and then apply a periodic adjustment for private use. But it can also create additional reporting obligations and requires a reliable measure of private use.

If you choose an “all reclaim then adjust” approach, you should be disciplined about maintaining the evidence that supports the private-use calculation. Otherwise you can end up in the worst of both worlds: a full claim with no defensible adjustment.

Partial exemption: the mixed-use problem inside the business

Even if there is no personal use, VAT recovery can be restricted when a business makes exempt supplies. Financial services, insurance, certain property transactions, health and education services, and other categories may be exempt depending on local rules. If you make both taxable and exempt supplies, you may need a partial exemption calculation.

The usual logic is:

1) Identify VAT that relates directly to taxable supplies. Recoverable.

2) Identify VAT that relates directly to exempt supplies. Not recoverable.

3) Identify VAT that relates to both. Apportion using a method, often starting with a turnover-based ratio.

Where turnover is a poor proxy for use—common in businesses with high-value exempt transactions but low resource use—tax authorities may allow or require alternative methods. The goal remains to achieve a result that reflects how costs support taxable vs exempt activity.

Partial exemption can also involve annual adjustments, de minimis thresholds (where small exempt input VAT can still be recovered), and special rules for certain sectors. If partial exemption applies to you, mixed-use VAT becomes a recurring compliance process rather than an occasional judgment call.

Capital items and longer-term adjustments

VAT recovery is not always “set and forget.” For significant capital items—especially property and expensive assets—some VAT regimes require adjustments over multiple years if use changes. For example, if you reclaim VAT on an asset based on expected business use and later the asset is used more privately (or supports more exempt activities), you may have to repay some VAT through an adjustment mechanism.

The underlying principle is that VAT recovery should match the actual use of the asset over time, not just the initial plan. If your business evolves, mixed-use calculations may need to evolve too. That is why documenting the basis of your original claim is important: it shows that the initial recovery was reasonable given what you knew at the time.

Common mistakes with mixed-use VAT

Mixed-use VAT errors are often not intentional; they happen because the rules are nuanced and the paperwork is messy. Here are frequent pitfalls:

Claiming 100% VAT because the invoice is in the business name. The name on the invoice helps, but it does not override private use.

Using an arbitrary percentage with no evidence. “I think it’s about 80% business” is not a method. A small amount of sampling or a simple log can transform a guess into a defensible calculation.

Forgetting partial exemption. Some businesses focus on private use splits and overlook that exempt supplies may restrict recovery even on business-only costs.

Not separating direct costs. Applying a broad split to everything can under-claim or over-claim. Both are problems: over-claim creates risk; under-claim wastes cash.

Failing to review when circumstances change. Hiring staff, moving premises, changing business models, or switching from office-based to home-based work can materially change usage.

Not keeping documentation. A reasonable method with no records is hard to defend. A slightly imperfect method with good records is often easier to support.

How to design a practical mixed-use VAT policy

A mixed-use VAT policy does not need to be long. For many small businesses, one or two pages is enough. The value of a policy is that it reduces ad-hoc decisions and keeps treatment consistent.

A practical policy might include:

Expense categories and method: Phone: usage sample quarterly; broadband: annual sample; vehicle: mileage log; home office utilities: floor area and time-based split.

Evidence to retain: Specify what you keep (e.g., mileage logs, screenshots of usage reports, measurement notes).

Review frequency: For example, review splits annually or when there is a material change.

Materiality threshold: Decide when it is worth doing detailed analysis. For very small costs, a simplified approach may be acceptable, but you should still be able to explain it.

Approval and responsibility: Who sets the percentage, who reviews it, and who updates it.

The policy is not just about compliance. It also helps with budgeting and pricing because you understand which VAT is recoverable and which becomes a real cost.

Worked approach: step-by-step for any mixed-use expense

When you face a mixed-use cost, work through a consistent checklist:

Step 1: Confirm the VAT basics. Are you VAT-registered? Is the supplier VAT-registered? Is VAT properly charged? Do you have a valid VAT invoice?

Step 2: Identify the nature of use. Is this mixed business/personal, mixed taxable/exempt, or both?

Step 3: Attribute what you can. Separate any part that is clearly business taxable or clearly private/exempt.

Step 4: Choose an apportionment basis for the shared part. Time, space, usage, turnover, or another fair proxy.

Step 5: Gather evidence. Logs, samples, measurements, or reports that support the percentage.

Step 6: Apply consistently. Use the method across periods and similar costs.

Step 7: Review periodically. Update only when reality changes, and document why.

This framework works whether you are dealing with a £30 monthly phone bill or a £300,000 renovation.

How mixed-use interacts with staff expenses and benefits

Mixed-use is not limited to owners. Staff can use business assets privately too—company phones, laptops, vehicles, even shared subscriptions. Where private use exists, you need a VAT position that matches how the asset is provided and used.

If staff reimburse the business for private use, that may change the VAT treatment depending on whether the reimbursement is treated as consideration for a supply. If the business provides private use as part of remuneration, VAT rules may treat that differently again. The details vary widely by jurisdiction, but the practical message is consistent: private use by anyone, not just the owner, can affect VAT recovery or create a requirement to account for VAT.

If your business provides assets with significant private use, it is wise to set clear policies (for example, what level of private use is permitted, whether staff contribute, and how usage is measured) because the HR policy and the VAT policy often need to align.

Mixed-use and entertainment: proceed carefully

Some categories of expense are sensitive in VAT. Entertainment, hospitality, and meals often have restrictions on VAT recovery even when they relate to business. If an entertainment cost is mixed-use, the default risk is higher because tax authorities tend to scrutinise these claims.

Separating staff subsistence while traveling for business from client entertainment can be important, as the VAT treatment may differ. If a cost includes both legitimate business subsistence and a personal element (for example, extending a work trip for leisure), the mixed-use apportionment should be based on nights stayed, days on business activities, or another clear driver.

The more “dual-purpose” and discretionary the expense, the more important the documentation becomes.

Mixed-use expenses for sole traders vs limited companies

People often assume that mixed-use VAT is simpler or more flexible for one legal form than another. In reality, the principle is similar, but the facts differ:

Sole traders: The owner and the business are legally the same person in many respects, which can make it tempting to treat everything as business. VAT rules still require you to restrict recovery for private use. The administrative challenge is that personal and business life are often more intertwined.

Limited companies: The company is a separate legal person. Assets belong to the company, not the director. That separation can make it easier to put contracts in the company name and track business expenses, but it can also increase the need to address benefits and private use explicitly, especially where directors use company assets personally.

Whichever structure you have, the best practice is the same: separate assets where possible, document the rest.

Practical tips to reduce mixed-use VAT headaches

Mixed-use VAT is manageable if you build some simple habits:

Maintain separate accounts and contracts where possible. A separate business phone and a separate personal phone can eliminate the problem entirely. The same is often true for broadband, software, and devices.

Use separate payment methods. Paying business costs from a business account helps keep the audit trail clear.

Capture usage evidence as you go. A mileage app or a monthly screenshot of usage reports is far easier than reconstructing everything later.

Set a review date. For example, every April or every VAT year-end, review your apportionment percentages.

Be realistic. If you work 30 hours a week and your household uses the internet heavily in the evenings and weekends, a claim of 95% business use will be hard to defend.

Consider materiality. Don’t spend hours on tiny amounts of VAT, but do have a sensible method you can explain.

What to do if you’ve been getting mixed-use VAT wrong

If you discover that you have over-claimed or under-claimed VAT on mixed-use costs, treat it like any other VAT error: quantify it, understand why it happened, and correct it using the appropriate mechanism in your jurisdiction (for example, adjusting a future return or making a disclosure if required). The correct process depends on local rules and the size of the error.

From a practical standpoint, also fix the underlying process. Errors often repeat because the business never defined a method or never kept the evidence. Implementing a simple policy and setting up a routine review can prevent the issue from recurring.

When specialist advice is worth it

For many day-to-day mixed-use costs—phones, broadband, minor home office expenses—you can build a reasonable method yourself. However, there are situations where the VAT stakes are high or the rules are particularly complex. Specialist advice is often worth considering when:

Property and construction are involved, especially refurbishments, conversions, and mixed residential/commercial projects.

Large capital purchases are made and there may be multi-year adjustment rules.

Partial exemption applies and you are unsure whether the standard method fairly reflects use.

Cross-border transactions and differing VAT treatments complicate attribution.

Unusual arrangements exist, such as shared ownership, complex group structures, or significant staff private use of assets.

Getting the VAT position right early can prevent costly corrections later and can improve cash flow by ensuring you reclaim what you are entitled to—no more and no less.

Putting it all together

VAT on mixed-use expenses is ultimately about aligning VAT recovery with reality. The tax authority’s concern is that VAT is a tax on consumption, and private consumption should not be relieved through business VAT recovery. Your concern is to reclaim the VAT you are entitled to without creating compliance risk.

The most reliable way to manage mixed-use VAT is to use a structured approach: identify mixed use, attribute direct costs, apportion shared costs using a fair proxy, keep evidence, and apply the method consistently. Mixed-use issues will never disappear entirely because business and life overlap, but with good habits and clear documentation, they become routine rather than stressful.

If you treat mixed-use VAT as a system—methods, records, and periodic review—you end up with claims that are defensible, repeatable, and proportionate. That is what “good” looks like in VAT compliance: not perfect precision, but a practical and well-supported reflection of how the expense is actually used.