In general terms, if a business is VAT registered, it will charge VAT to its customers (output VAT) which it then passes on to H M Revenue & Customs with its VAT returns.
The business will also have been charged VAT on goods and/or services from its suppliers (input VAT) and, subject to some exclusions and exceptions, the input VAT can be recovered from H M Revenue & Customs on the VAT returns (either as a deduction from the output VAT above or an actual repayment of VAT).
Criteria for VAT Incurred to be Treated as Deductible Input Tax
In order for VAT to be reclaimed or deducted as input tax, the following criteria must me met:
The business claiming input tax recovery must be a VAT registered business at the time the VAT was incurred. Input VAT incurred prior to VAT registration can be reclaimed following registration if the input VAT was in relation to a service supplied in the 6 months before VAT registration. If input VAT has been charged on goods prior to VAT registration, if the goods are still held by the business at the date of registration, the input VAT can be reclaimed.
The VAT must relate to an actual supply (e.g. where payments are made in advance for goods which are never actually supplied, input VAT cannot be reclaimed).
The amount to be claimed is the VAT properly chargeable and not the VAT actually charged where this is different. The business reclaiming recovery of input VAT must take reasonable steps to ensure that VAT charged is valid. (eg the business can ring the VAT helpline on 0300 200 3719 to check whether a VAT number is valid).
The business claiming input VAT recovery must hold a valid invoice or other satisfactory documentation.
Specific Items Excluded from Input VAT Recovery
There are a number of specific business expenses where input VAT is not recoverable. The main exclusions are as follows:
Business Entertainment - which will include the provision of food and drink, accommodation, tickets to events and facilities, etc. However, input VAT on staff entertaining is recoverable subject to certain conditions being met (not covered in this blog).
Purchase of cars (NB there are some exceptions to this where certain businesses use the cars 100% for business use e.g. motor vehicle leasing companies).
Goods sold under a second hand scheme (e.g. art dealers and second hand car dealers have specific schemes in place).
Input VAT Recovery – General Exclusions
In addition to the specific exclusions above, there are general exclusions including the following:
The business must retain a valid VAT invoice in the name of the business for input VAT recovery to be claimed.
The expenditure must be incurred for the purpose of the business (e.g. it must not be for private purposes nor for another business).
If the business provides exempt supplies, the related input VAT cannot be recovered (subject to "De minimis limit").
If the business adopts the flat rate scheme, input VAT cannot be recovered – the exception being VAT incurred on capital expenditure of over £2000 (including VAT).
Correcting Mistakes/Errors or making adjustments
If a genuine error has been made on a previous VAT return within the last 4 years, this can be corrected on your next VAT return.
The net value of the errors is compared to the greater of:
1% of the box 6 figure on your VAT return for the period when you discovered the error – subject to an upper limit of £50,000.
If you fall within these limits, you can make the adjustment on your current VAT return.
However, if the error is above these limits, you must report the errors to H M Revenue & Customs separately and in writing.
Advice and Support
Perrys prepare and submit VAT returns on behalf of many of our clients. Perrys also have an in-house VAT expert for assistance and advice with more complex VAT matters. If you, or your business, requires any advice in relation to VAT, please get in touch with your usual contact at Perrys to assist you.
Article written by Declan McCusker
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