Input tax recovery: key conditions

Rules for claiming input tax

HMRC can challenge your input tax claims for the last four years and issue an assessment if the officer thinks that you have failed to provide proper evidence to support your claim, or if other conditions have not been met. The basic rules for claiming input tax are as follows:

• a supplier must be selling goods or services to your business and not to any other person or entity
• the expense must be incurred for the purpose of your business
• it must relate to your taxable business activities and not an exempt or non-business activity where input tax claims are restricted
• the supplier must have charged you the correct rate of VAT
• you must hold documentary evidence to support your claim, usually a tax invoice
• a claim must not be blocked by the legislation, e.g. you cannot claim on business entertaining expenses, other than your staff.

An exception to the supply being made to your business relates to certain employee expenses. For example, if your employee pays for a hotel booking in their own name, and is directly invoiced by the hotel, you can still claim input tax if the purpose of the hotel stay was for a business reason. You must meet all the above conditions - not just some of them.

Purpose v benefit

There is an important difference between a business benefit and a business purpose. For example, you might win important jobs and orders by being a member of your local golf club. But you cannot claim input tax on your annual membership fees because the purpose of the expense is because you enjoy playing golf.

If you are a charity or not-for-profit organisation, you must also ensure that the purpose of the expense is directly relevant to your business rather than non-business activities.

If an expense is partly for business and partly for private or non-business purposes, you should apportion your input tax claim by using any method of calculation that is fair and reasonable.

Recent VAT case

In a recent case heard in the First-tier Tribunal, a firm of solicitors rented their premises from a landlord who charged them VAT. However, the lease was agreed between the landlord and a dormant company linked to the partnership, so the landlord invoiced the dormant company. HMRC said that the partnership could not claim input tax because the supply was to the company, even though the partnership paid the bill and received the invoices. Fortunately, the court allowed the appeal on the basis that the partnership was the true tenant and was using the premises for its own business activities.

Regularly review the contracts with your major suppliers to ensure there are no potential pitfalls that could cause an input tax challenge from HMRC, as was the case here.