Category Archives: Land & Property

VAT: Car parking provided by a hospital – Exempt? Non-Business? Taxable?

By   20 April 2021
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Latest from the courts

In the Northumbria Healthcare NHS Foundation Trust (The Trust) First Tier (FT) case the issue was whether pay and display car park charges were subject to VAT considering the status and activities of the Trust.

Background

The Trust provided parking for staff and visitors at the 14 sites for which it was responsible. The question was whether output tax was due on the parking charges. The Trust submitted a claim for overpaid VAT considering that either:

  • there was no economic activity, or, if there was,
  • there was a “special legal regime” which meant that tax was not due because The Trust was not a taxable person, or
  • the parking charges were closely related to the Trust’s exempt activity (medical care) such that they themselves were exempt

HMRC rejected the claim on the grounds that car parking is a standard rated supply and The Trust appealed against this decision.

It was agreed that The Trust, in carrying out its statutory activities (NHS medical services) is not in business (no economic activity) and therefore the services were outside the scope of VAT. Some private medical services were also supplied, and it was common ground that these were exempt.

Decision

The court found that:

  • the Trust made supplies for a consideration for the purposes of obtaining income on a continuing basis so there was economic activity
  • the Trust did not provide car parking under a “special legal regime” as a public authority; there is no concept of special legal regime in the relevant legislation
  • the treatment of The Trust as a non-taxable person re; car parking would lead to significant distortion of competition
  • supplies of car parking were not closely related to medical care. The service must be an indispensable stage and integral in the supply of medical services, ie; the diagnosis, treatment and cure of diseases or health disorders
  • the supply of car parking was consequently a taxable business activity carried out by a taxable person, was not exempt, so output tax was properly due.

Commentary

We are aware of a number of cases stayed behind this appeal and there will be disappointment, but little surprise (I suspect) at the outcome. Car parking is a significant source of income for hospitals, medical centres and clinics etc, but this case made it clear that there is no difference in VAT terms between hospital parking and other commercial car parks.

VAT – Top 10 Tax Point Planning Tips

By   25 March 2021
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VAT Tax Point Planning

If a business cannot avoid paying VAT to the HMRC, the next best thing is to defer payment as long as legitimately possible. There are a number of ways this may be done, dependent upon a business’ circumstances, but the following general points are worth considering for any VAT registered entity.

A tax point (time of supply) is the time a supply is “crystallised” and the VAT becomes due to HMRC and dictates the VAT return period in which VAT must be accounted for.  Very broadly, this is the earliest of; invoice date, receipt of payment, goods transferred or services completed (although there are quite a few fiddly bits to these basic rules as set out in the link above).

 The aims of tax point planning

1.            Deferring a supplier’s tax point where possible.  It is sometimes possible to avoid one of these events or defer a tax point by the careful timing of the issue of a tax invoice.

2.            Timing of a tax point to benefit both parties to a transaction wherever possible. Because businesses have different VAT “staggers” (their VAT quarter dates may not be the co-terminus) judicious timing may mean that the recipient business is able to recover input tax before the supplier needs to account for output tax.  This is often important in large or one-off transactions, eg; a property sale.

3.            Applying the cash accounting scheme. Output tax is usually due on invoice date, but under the cash accounting scheme VAT is only due when a payment is received.  Not only does this mean that a cash accounting business may delay paying over VAT, but there is also built in VAT bad debt relief.  A business may use cash accounting if its estimated VAT taxable turnover during the next tax year is not more than £1.35 million.

4.            Using specific documentation to avoid creating tax points for certain supplies. If a business supplies ongoing services (called continuous services – where there is no identifiable completion of those services) if the issue of a tax invoice is avoided, VAT will only be due when payment is received (or the service finally ends). More details here.

5.            Correctly identifying the nature of a supply to benefit from certain tax point rules. There are special tax point rules for specific types of supplies of goods and services.  Correctly recognising these rules may benefit a business, or present an opportunity for VAT planning.

6.            Generate output tax as early as possible in a VAT period, and incur input tax as late as possible. This will give a business use of VAT money for up to four months before it needs to be paid over, and of course, the earlier a claim for repayment of input tax can be made – the better for cashflow.

7.            Planning for VAT rate changes. Rate changes are usually announced in advance of the change taking place.  There are specific rules concerning what cannot be done, but there are options to consider when VAT rates go up or down.

8.            Ensure that a business does not incur penalties for errors by applying the tax point rules correctly. Right tax, right time; the best VAT motto!  Avoiding penalties for declaring VAT late is obviously a saving.

9.            Certain deposits create tax points, while other types of deposit do not.  It is important to recognise the different types of deposits and whether a tax point has been triggered by receipt of one. Also VAT planning may be available to avoid a tax point being created, or deferring one.

10.         And finally, use duty deferment for imports. As the name suggests, this defers duty and VAT to avoid it having to be paid up front at the time of import.

Always consider discussing VAT timing planning for your specific circumstances with your adviser. It should always be remembered that it is usually not possible to apply retrospective VAT planning as VAT is time sensitive, and never more so than tax point planning.

I have advised a lot of clients on how to structure their systems to create the best VAT tax point position.  Any business may benefit, but  I’ve found that those with the most to gain are; professional firms, building contractors, tour operators, hotels, hirers of goods and IT/internet businesses.

VAT registration delays – latest

By   8 March 2021
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Anecdotally, we understand that some businesses applying for registration are experiencing significant delays. Further, attempts to contact HMRC by email is often difficult, and telephones are regularly not answered (although we understand that some people have enjoyed more success with the webchat).  Also, the Non-Established Taxable Persons (NETP) office has moved, right at the time when more EU businesses need to register in the GB due to Brexit. This has created an even longer backlog.

Confirmation

The Business Delivery Team at HMRC has confirmed that it is attempting to deal with a very high number of applications, which are being delayed for various reasons (not least by the sheer volume one expects). The department has also stated that the following actions and checks will assist with faster processing times and urges applicants to check that all information requested set out here is included with the application to avoid any further delays.  The most salient being to use the online method rather than the hard copy. However, this is not always possible if additional documentation needs to be sent.

How to avoid common errors identified by HMRC 

  • ensure that the addresses provided on the VAT 1 form matches the business’s principal place of business (PPOB)
  • check that the notification of a trade classification matches the supplies the business makes
  • the VAT treatment of activities must be correctly identified
  • the correct person must sign the application – eg; for a corporate body it must be a director, company secretary or authorised signatory or an authorised agent
  • ensure the correct registration date (effective date of registration – EDR) is given. And that the EDR is accurate considering the circumstances that have been outlined for requesting registration elsewhere in the application
  • the bank account details provided must be in the name of the taxable person

And I will add; do not forget form VAT5L when registering a business which is involved in land and property transactions.

The Business Delivery Team also stated that “We are also considering how we can improve the registration process by resolving more cases in real time by telephone and engaging with customers in a different way to gather any further required information. We’ll tell you more about this shortly.”

While any improvement in communication is to be welcomed, it remains to be seen what practical measures will be implemented to speed up registration processing and how soon these will be put in place.

 

VAT: Budget 2021 – hospitality, holiday accommodation and attractions

By   4 March 2021
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Further to my articles here and here the government have announced further measures for hospitality, holiday accommodation and tourist attractions.

These measures introduce

  • an extension to the temporary reduced rate of VAT (5%) for a further 6 month period until 30 September 2021. A new reduced rate of will then be introduced until 31 March 2022.
  • a new reduced rate of 12.5% will then be introduced which will end on 31 March 2022.

Aims

These changes are aimed at supporting the reopening of the economy following the outbreak of the coronavirus pandemic and help to re-establish habits such as eating out in restaurants.

The measures will help to protect an estimated 2.4 million jobs in these industries.

A CASC is not a charity for VAT – The Eynsham Cricket Club case

By   2 March 2021
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Latest from the courts

In the Court of Appeal (CoA) case of Eynsham Cricket Club (ECC) the issue is whether a Community Amateur Sport Club (CASC) is able to take advantage of VAT reliefs in the same way as a charity.

Background

The question was whether supplies of construction services of building a new cricket pavilion for a CASC qualify for zero-rating via The VAT Act 1994, Schedule 8. Group 5, item 2 (a) “The supply in the course of the construction of a building designed as a dwelling or number of dwellings or intended for use solely for a relevant residential purpose or a relevant charitable purpose…”Emphasis added.

The outcome depended on whether ECC was a charity. That in turn depends on whether:

  • ECC was “established for charitable purposes only” pursuant to Schedule 6 to the Finance Act 2010
  • Section 6 of the Charities Act 2011 applied and had the effect of preventing ECC from being treated as “established for charitable purposes”
  • ECC satisfied the other conditions, and in particular, the “registration condition”

Decision

It was determined that CASCs cannot be treated as charities for VAT purposes as the above criteria were not met. Therefore, the construction of ECC’s new pavilion did not qualify for zero-rating and was standard rated. It was noted that becoming a CASC meant that certain charitable benefits were forgone in return for relief for certain administrative and management chores.

Commentary

It appears that ECC had the opportunity to register as a charity, but apparently, unlike a near neighbour cricket club, decided not to.

“Charity” is not defined in VAT legislation, so this case is a reminder that it should not be assumed that every entity which may have charitable objectives, or generally exist in order to benefit a section of the community qualifies as a charity for the tax.

VAT: Domestic Reverse Charge for construction services from 1 March 2021

By   17 February 2021
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A reminder

The twice delayed introduction of the Domestic Reverse Charge (DRC) for the construction industry will be introduced from the first of next month and affected businesses need to have the necessary procedures in place – as it won’t be deferred again.!

Details of the scheme here and here.

Please contact us if you have any queries.

VAT – Apportionment issues: Complex and costly

By   16 February 2021
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The dictionary definition of the verb to apportion is “to distribute or allocate proportionally; divide and assign according to some rule of proportional distribution”. 

So why is apportionment important in the world of VAT and where would a business encounter the need to apportion? I thought that it might be useful to take an overall look at the subject as it is one of, if not the most, contentious areas of VAT. If affects both output tax declarations and input tax claims, so I have looked at these two areas separately. If an apportionment is inaccurate it will either result in paying too much tax, or risking penalties and additional attention from HMRC; both of which are to be avoided!

The overriding point in all these examples is that any apportionment must be “fair and reasonable”.

Supplies

The following are examples of where a business needs to apportion the value of sales:

  • Retail sales

Retailers find it difficult to account for VAT in the normal way so they use what is known as a retail scheme. There are various schemes but they all provide a formula for calculating VAT on sales at the standard, reduced and zero rate. This is needed for shops that sell goods at different rates, eg; food, clothing and books alongside standard rated supplies.  As an example, in Apportionment Scheme 1 a business works out the value of its purchases for retail sale at different rates of VAT and applies those proportions to its sales.

  • Construction

A good example here is if a developer employs a contractor to construct a new building which contains retail units on the ground floor with flats above.  The construction of the commercial part is standard rated, but the building of the residential element is zero rated.  The contractor has to apportion his supply between the two VAT rates.  This apportionment could be made with reference to floorspace, costs, value or any other method which provides a fair and reasonable result.  The value of supplies relating to property is often high, so it is important that the apportionment is accurate and not open to challenge from HMRC.  I recommend that agreement on the method used is agreed with HMRC prior to the supply in order to avoid any subsequent issues.

  • Property letting

Let us assume that in the construction example above, when the construction is complete, the developer lets the whole building to a third party. He chooses to opt to tax the property in order to recover the attributable input tax.  The option has no effect on the residential element which will represent an exempt supply. Consequently, an apportionment must be made between the letting income in respect of the shops and flats.

  • Subscriptions

There has been a great deal of case law on whether subscriptions to certain organisations by which the subscriber obtains various benefits represent a single supply at a certain VAT rate, or separate supplies at different rates. A common example is zero rated printed matter with other exempt or standard rated supplies.

  • Take away

Most are familiar with the furore over the “pasty tax” and even with the U-turn, the provision of food/catering is often the subject of disputes over apportionment.  Broadly; the sale of cold food for take away is zero rated and hot food and eat in (catering) is standard rated.  There have been myriad cases on what’s hot and what’s not, what constitutes a premises (for eat in), and how food is “held out” for sale. The recent Subway dispute highlights the subtleties in this area. I have successfully claimed significant amounts of overpaid output tax based on this kind of apportionment and it is always worth reviewing a business’s position.  New products are arriving all the time and circumstances of a business can change.  A word of warning here; HMRC regularly mount covert observation exercises to record the proportion of customers eating in to those taking away.  They also carry out “test eats” so it is crucial that any method used to apportion sales is accurate and supportable.

  • Opticians

Opticians have a difficult time of it with VAT.  Examinations and advice services are exempt healthcare, but the sale of goods; spectacles and contact lenses, is standard rated.  Almost always a customer/patient pays a single amount which covers the services as well as the goods. Apportionment in these cases is very difficult and has been the subject of disagreement and tribunal cases for many years; some of which I have been involved in.  Not only is the sales value apportionment complex, but many opticians are partly exempt which causes additional difficulties. I recommend that all opticians review their VAT position.

Input tax recovery

  • Business/Non-Business (BNB)

If an entity is involved in both business and non-business activities, eg; a charity which provides free advice and also has a shop which sells donated goods. It is unable to recover all of the VAT it incurs.  VAT attributable to non-business activities is not input tax and cannot be reclaimed.  Therefore it is necessary to calculate the quantum of VAT attributable to BNB activities, that VAT which cannot be attributed is called overhead VAT and must be apportioned between BNB activities.  There are many varied ways of doing this as the VAT legislation does not specify any particular method.  Therefore it is important to consider all of the available alternatives. Examples of these are; income, expenditure, time, floorspace, transaction count etc.

  • Partial exemption

Similarly to BNB if a business makes exempt supplies, eg; certain property letting, insurance and financial products, it cannot recover input tax attributable to those exempt supplies (unless the value is de minimis). Overhead input tax needs to be apportioned between taxable and exempt supplies.  The standard method of doing this is to apply the ratio of taxable versus exempt supply values to the overhead tax. However, there are many “special methods” available, but these have to be agreed with HMRC.  Partial exemption is often complex and always results in an actual VAT cost to a business, so it is always worthwhile to review the position regularly.  Exemption is not a relief to a business.

  • Attribution

In both BNB and partial exemption situations before considering overheads all VAT must, as far as possible, be attributed to either taxable or exempt and non-business activities. This in itself is a form of apportionment and it is often not clear how the supply received has been used by a business, that is; of which activity is it a cost component?

  • Business entertainment

At certain events staff may attend along with other guests who are not employed. The recovery of input tax in respect of staff entertainment is recoverable but (generally) entertaining non staff members is blocked. Therefore an apportionment of the VAT incurred on such entertainment is required.

  • Business and private use of an asset

If a company owns, say, a yacht or a helicopter and uses it for a director’s own private use, but it is chartered to third parties when not being used (business use) an apportionment must be made between the two activities. The most usual way of doing this is on a time basis. Apportionment will also be required in the example of a business owning a holiday home used for both business and private purposes. Input tax relating to private (non-business) use is always blocked.

  • Motoring expenses

It is common for a staff member to use a car for both business and private purposes.  Input tax is only recoverable in respect of the business use so an apportionment is required.  This may be done by keeping detailed mileage records, or more simply by applying the Road Fuel Scale Charge which is a set figure per month which represents a disallowance for private use.

The above examples are not exhaustive but I hope they give a flavour to the subject.

If your business apportions, or should apportion, values for either income or expenditure I strongly recommend a review on the method.  There is often no “right answer” for an apportionment and I often find that HMRC impose unnecessarily harsh demands on a taxpayer.  Additionally, many business are unaware of alternatives or are resistant to challenging HMRC even when they have a good case.

VAT: Unjust enrichment. The Deluxe case

By   13 January 2021
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Latest from the courts

In the Deluxe Property Holdings Limited High Court case (Deluxe) the issue was whether a VAT claim needed to be passed back to the supplier after a correction – whether the unjust enrichment applied.

Background

Deluxe employed SCL Construction Limited (SCL) to carry out building works. SCL raised invoices in respect of the construction of student accommodation at 20%. It was, however, common ground that the works were in fact zero-rated. SCL recovered the overcharged VAT from HMRC via a VAT Act 1994 Section 80 claim. SCL undertook to repay the amount of VAT to Deluxe via section 10 of VAT Notice 700/45. Without such written reimbursement undertaking, HMRC would have been entitled to refuse the claim. SCL did not make the payment to Deluxe.

Issue

The issue between the parties was whether:

  • SCL holds the accounting credit obtained from HMRC on trust for Deluxe, or;
  • the claim is only in debt, in which case SCL sought to set-off such the claim against other monies that it alleges are owed by Deluxe

Decision

The court ruled that SCL had undertaken to reimburse its customer all of the amount credited by HMRC without any deduction, for whatever purpose. Further, SCL had undertaken that it could not use the credit for any other purpose. It was a payment made by HMRC for the sole and express purpose of allowing SCL to reimburse the mistakenly charged VAT to Deluxe and was clearly intended to restrict SCL’s freedom of disposal so that the credit was to be exclusively used for the stated purpose without set-off.

Although SCL gave its undertaking to HMRC rather than to Deluxe to pass on the money, it held the repayment on trust for Deluxe and gave rise to a Quistclose Trust*

Additionally, a constructive trust arose because it would be unacceptable for SCL to derive a benefit of the VAT repayment.

The court found that SCL has acted in breach of trust and is liable as trustee to restore the trust fund and transfer to Deluxe the balance of the trust property without offsetting it against amounts that it claimed it was owed by Deluxe.

Commentary

This is a logical and expected decision and the reasoning is helpful for similar disputes.

*  A trust may arise where one person, A, advances money to another, B, on the understanding that B is not to have the free disposal of the money and that it may only be applied for the purpose stated by A. The effect of the trust is to reserve in A the beneficial interest in the money, so providing him with some proprietary security for his advance.

VAT – The Capital Goods Scheme

By   8 January 2021
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A brief guide to the Capital Goods Scheme (CGS)

If a business acquires or creates a capital asset it may be required to adjust the amount of VAT it reclaims. This mechanism is called the CGS and it requires a business to spread the initial input tax claimed over a number of years. If a business’ taxable use of the asset increases it is permitted to reclaim more of the original VAT and if the proportion of the taxable supplies decreases it will be required to repay some of the input tax initially claimed. The use of the CGS is mandatory. 

How the CGS works

Normally, VAT recovery is based on the initial use of an asset at the time of purchase (a one-off claim). The CGS works by applying a longer period during which the initial recovery may be adjusted if there are changes in the use of the asset. Practically, the CGS will only apply in situations where there is exempt or non-business use of the asset. A business using an asset for fully taxable purposes will be covered by the scheme, but it is likely that full recovery up front will be possible with no subsequent adjustments required. This will be the position if, say, a standard rated property is purchased, the option to tax taken, and the building let to a third party. The CGS looks at how capital items have been used in the business over a number of intervals (usually, but not always; years).  It adjusts both for taxable versus exempt use and for business versus non business use over the lifetime of the asset. Example; a business buys a yacht that is hired out (business use) and it is also used privately by a director (non-business use). However, a more common example is a business buying a property and occupying it while its trade includes making some exempt supplies. 

Which businesses does it affect?

Purchasers of certain commercial property, owners of property who carry out significant refurbishment or carry out civil engineering work, purchasers of computer hardware, aircraft, ships, and other vessels over a certain monetary value who incur VAT on the cost.  (As the CGS considers the recovery of input tax, only VAT bearing assets are covered by it).

Assets not covered by the scheme

The CGS does not apply if a business;

  • acquires an asset solely for resale
  • spends money on assets that it acquired solely for resale
  • acquires assets, or spends money on assets that are used solely for non-business purposes.

Limits for capital goods

Included in the CGS are:

  • Land, property purchases – £250,000 or over
  • Refurbishment or civil engineering works costing £250,000 or over
  • Computer hardware costing £50,000 or over (single items, not networks)
  • From 2011, aircraft, ships, and other vessels costing £50,000 or more.

Assets below these (net of VAT) limits are excluded from the CGS.

The adjustment periods

  • Five intervals for computers
  • Five intervals for ships and aircraft
  • Ten intervals for all other capital items

Changes in your business circumstances

Certain changes to a business during a CGS period will impact on the treatment of its capital assets. These changes include:

  • leaving or joining a VAT group
  • cancelling your VAT registration
  • buying or selling your business
  • transferring a business as a going concern (TOGC)
  • selling an asset during the adjustment period

Specific advice should be sought in these circumstances.

Examples

  1. A retailer purchases a brand new property to carry on its fully taxable business for £1 million plus £200,000 VAT. It is therefore above the CGS limit of £250,000. The business recovers all of the input tax on its next return. It carries on its business for five years, at which time it decides to move to a bigger premises. It rents the building to a third party after moving out without opting to tax. Under the CGS it will, broadly, have to repay £100,000 of the initial input tax claimed.  This is because the use in the ten year adjustment period has been 50% taxable (retail sales) for the first five years and 50% exempt (rent of the property for the subsequent five years).
  2. A company purchases a helicopter for £150,000 plus VAT of £30,000. It uses the aircraft 40% of the time for hiring to third parties (taxable) and 60% for the private use of the director (non-business).  The company reclaims input tax of £12,000 on its next return. Subsequently, at the next interval, taxable use increases to 50%. It may then make an adjustment to increase the original claim: VAT on the purchase £30,000 divided by the number of adjustment periods for the asset (five) and then adjusting the result for the increase in business use: £30,000 / 5 = 6000 50% – 40% = £600 additional claim

Danger areas

  • Overlooking CGS at time of purchase or the onset of building works
  • Not recognising a change of use
  • Selling CGS as part of a TOGC
  • Failing to make required CGS adjustments at the appropriate time
  • Overlooking the option to tax when renting or selling a CGS property asset
  • Sale during adjustment period (not a TOGC)
  • Complexities re; first period adjustments and pre-VAT registration matters
  • Interaction between CGS and partial exemption calculations

Summary

There is a lot of misunderstanding about the CGS and in certain circumstances it can produce complexity and increased record keeping requirements.  There are also a lot of situations where overlooking the impact of the CGS or applying the rules incorrectly can be very costly. However, it does produce a fairer result than a once and for all claim, and when its subtleties are understood, it quite often provides a helpful planning tool.

What VAT CAN’T you claim?

By   2 December 2020
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VAT Basics

The majority of input tax incurred by most VAT registered businesses may be recovered.  However, there is some input tax that may not be.  I thought it would be helpful if I pulled together all of these categories in one place:

Blocked VAT Claims

A brief overview

  • No supporting evidence

In most cases this evidence will be an invoice (or as the rules state “a proper tax invoice)” although it may be import, self-billing or other documentation in specific circumstances.  A claim is invalid without the correct paperwork.  HMRC may accept alternative evidence, however, they are not duty bound to do so (and rarely do).  So ensure that you always obtain and retain the correct documentation.

  • Incorrect supporting evidence

Usually this is an invalid invoice, or using a delivery note/statement/pro forma in place of a proper tax invoice. To support a claim an invoice must show all the information set out in the legislation.  HMRC are within their rights to disallow a claim if any of the details are missing.  A full guide is here.

  •  Input tax relating to exempt supplies

Broadly speaking, if a business incurs VAT in respect of exempt supplies it cannot recover it.  If a business makes only exempt supplies it cannot even register for VAT.  There is a certain easement called de minimis which provide for recovery if the input tax is below certain prescribed limits. Input tax which relates to both exempt and taxable activities must be apportioned. More details of partial exemption may be found here.

  •  Input tax relating to non-business activities

If a charity or NFP entity incurs input tax in connection with non-business activities this cannot be recovered and there is no de minimis relief.  Input tax which relates to both business and non-business activities must be apportioned. Business versus non-business apportionment must be carried out first and then any partial exemption calculation for the business element if appropriate. More details here.

  •  Time barred

If input tax is not reclaimed within four years of it being incurred, the capping provisions apply and any claim will be rejected by HMRC.

  •  VAT incurred on business entertainment

This is always irrecoverable unless the client or customer being entertained belongs overseas.  The input tax incurred on staff entertainment costs is however recoverable.

  •  Car purchase

In most cases the VAT incurred on the purchase of a car is blocked. The only exceptions are for when the car; is part of the stock in trade of a motor manufacturer or dealer, or is used primarily for the purposes of taxi hire; self-drive hire or driving instruction; or is used exclusively for a business purpose and is not made available for private use. This last category is notoriously difficult to prove to HMRC and the evidence to support this must be very good.

  •  Car leasing

If a business leases a car for business purposes it will normally be unable to recover 50% of the VAT charged.  The 50% block is to cover the private use of the car.

  •  A business using certain schemes

For instance, a business using the Flat Rate Scheme cannot recover input tax except for certain large capital purchases, also there are certain blocks for recovery on TOMS users

  •  VAT charged in error

Even if you obtain an invoice purporting to show a VAT amount, this cannot be recovered if the VAT was charged in error; either completely inappropriately or at the wrong rate.  A business’ recourse is with the supplier and not HMRC.

  • Goods and services not used for a business

Even if a business has an invoice addressed to it and the services or goods are paid for by the business, the input tax on the purchase is blocked if the supply is not for business use.  This may be because the purchase is for personal use, or by anther business or for purposes not related to the business.

  • VAT paid on goods and services obtained before VAT registration

This is not input tax and therefore is not claimable.  However, there are exceptions for goods on hand at registration and services received within six months of registration if certain conditions are met.

  •  VAT incurred by property developers

Input tax incurred on certain articles that are installed in buildings which are sold or leased at the zero rate is blocked. Details here.

  •  Second hand goods

Goods sold to you under one of the VAT second-hand schemes will not show a separate VAT charge and no input tax is recoverable on these goods.

  •  Transfer of a going concern (TOGC)

Assets of a business transferred to you as a going concern are not deemed to be a supply for VAT purposes and consequently, there is no VAT chargeable and therefore no input tax to recover.

  •  Disbursements

A business cannot reclaim VAT when it pays for goods or services to be supplied directly to its client. However, in this situation the VAT may be claimable by the client if they are VAT registered. For more on disbursements see here.

  •  VAT incurred overseas

A business cannot reclaim VAT charged on goods or services that it has bought from suppliers in other EU States. Only UK VAT may be claimed on a UK VAT return. There is however, a mechanism available to claim this VAT back from the relevant VAT body in those States. However, in most cases, supplies received from overseas suppliers are VAT free, so it is usually worth checking whether any VAT has been charged correctly.

Input tax incurred on expenditure is one of the most complex areas of VAT.  It also represents the biggest VAT cost to a business if VAT falls to be irrecoverable.  It is almost always worthwhile reviewing what VAT is being reclaimed.  Claim too much and there could well be penalties and interest, and of course, if a business is not claiming as much input tax as it could, this represents a straightforward cost.