Andrew Needham looks at recovering input tax in practice and the evidence that may be needed other than the purchase invoice.
Businesses must overcome a number of hurdles in order to claim back input tax; it’s not just as simple as having a purchase invoice.
Any input tax claimed by a business must relate to a supply that has actually taken place. For example, where a payment has been made and an invoice received but the goods or services were never physically supplied, input tax should not be claimed as no supply has taken place.
In a First-tier Tribunal case (David Peters Ltd v HMRC [2012] UKFTT 124 (TC)), the taxpayer was allowed to reclaim the input tax on a purchase they had paid for and had a valid invoice for, but which was lost in the post. The tribunal considered that a supply had actually taken place and the goods had existed but had just been lost in transit.
Claim what should have been charged
You can only claim the amount of VAT that is properly chargeable, and not what has actually been charged where this is different. This can give rise to a number of problems.
If a supplier wrongly calculates VAT and charges too much, only the lower, correct amount can be reclaimed.
Example 1: Incorrect VAT rate
A builder wrongly charges VAT at the standard rate on a supply that should have been charged at the 5% lower rate. The customer can only reclaim the 5% VAT that should have been properly charged even though they have paid VAT at 20%.
In these circumstances, a business should go back to its supplier and ask for a credit note for the wrongly charged VAT.
Where an unregistered trader shows VAT on an invoice, this is not input tax and cannot be reclaimed. However, by concession HMRC may allow a claim in these circumstances if certain conditions are fulfilled:
- The recipient of the supply is neither involved in nor has close knowledge of the supplier’s business.
- It was reasonable for the recipient to consider that VAT had been lawfully charged.
-
The claim is made in respect of goods or services genuinely supplied at the stated value.
In addition, VAT wrongly charged on a zero-rated, exempt or outside-the-scope supply is not input tax and cannot be reclaimed.
Only the recipient can claim the VAT
Only the recipient of the supply can actually reclaim the VAT charged.
Example 2: Due diligence costs
A business approaches its bank for a loan. The bank hires accountants to perform a due diligence check on the business to see if it is creditworthy.
The business has to pay for the due diligence check but can’t reclaim the VAT as the actual supply is to the bank.
The supply must be for the business
Input tax can only be reclaimed on supplies for a business purpose.
So, if a business owner is prosecuted for dangerous driving and puts the costs of a lawyer through its business, it cannot reclaim the VAT as it is a personal matter and not for a business purpose.
And finally!
The final hurdles to overcome are that the input tax on the supply must not be subject to a statutory block.
For instance, where a business purchases a car including for private use or buys goods on a second hand margin scheme or for business entertainment, input tax recovery is not allowed.
Practical tip
Make sure the supply is to the business and not a third party, and that it has been correctly charged and has a business purpose.
