VIT12500 | VAT Input Tax basics: the significance of the definitions of input tax

VAT becomes input tax when the conditions set out in the legal definitions are met. VAT does not automatically become input tax because it has been incurred by someone who is registered for VAT. Also, there are times when input tax cannot be claimed.

To decide whether tax incurred is input tax you may have to answer one or more of the following questions:

Does the tax incurred relate to an actual supply or import?

If the answer is no, the tax is not input tax. See Pennystar Ltd VIT61250.

Was the supplier a taxable person at the time of the supply?

You can claim input tax if the supplier was not registered for VAT but was required to be as long as the other conditions set out in this manual are met. See Ellen Garage (Oldham) Ltd, VIT61250. See also VIT31000 and VIT31200 for more on evidence and deduction.

However, more recent tribunal decisions about claims made without a valid invoice show that all cases need to be considered on their own merits. See Ahmed (M) t/a New Touch and also Hargreaves (UK) plc at VIT61250 where the tribunal has upheld HMRC’s decision to use its discretion when deciding whether to allow input tax claims.

The customer has not incurred input tax if the supplier was neither registered nor required to be. However, Extra Statutory Concession 3.9 allows you to authorise recovery of the amount charged as “tax” subject to certain conditions. You will find more about this at Extra Statutory Concession 3.9 (link is external).

Was the transaction on which the tax was incurred taxable at a positive rate?

Tax charged wrongly on a supply which is outside the scope, exempt or zero rated is not input tax. See Da Conti International Ltd VIT61250.

Were the goods or services supplied to or imported by the person making the claim?

The VAT charged is only the customer’s input tax if the person making the claim imported (the goods as owner) or had the goods or services supplied to them. This “supply rule” is set out at VIT11500 in section 24 of the VAT Act 1994.

Was the recipient a taxable person at the time the tax was incurred?

If not the customer may still be entitled to recover the tax as if it were input tax under Regulation 111 of the VAT (General) Regulations 1995. More information about this is given at VIT32000.

Did the recipient obtain the goods or services for the purpose of their business?

The question of business purpose is the issue most commonly disputed in connection with input tax. This question is covered at VAT Business/Non-Business VBNB3000.