The VAT rules are relatively easy to operate on a day-to-day basis, if all your income is business related and all your sales are subject to VAT. You can reclaim all the VAT incurred on your purchases, and you don’t have to worry about apportioning your input costs.
However, some organisations receive income from non-business activities, such as grants for undertaking environmental work, or have sales which are exempt from VAT. In these cases, the VAT-registered business will have to apportion its input costs between business/ non-business activities, or between sales which are VATable / exempt.
Opticians in particular may make a large amount of exempt sales, as an eye-test is exempt from VAT. There is a standard method for apportioning costs for exempt sales, but this will not suit all businesses.
If your business has an unusual mixture of exempt/ VATable sales or a significant amount of non-business income, it is wise to agree a method of cost apportionment with HMRC. This agreement should be made in writing and reviewed regularly to check that circumstances haven’t changed.
HMRC may question your calculations years later, but if you can point to the agreement made, and show you have consistently followed the apportionment method, HMRC’s challenge should fall away.