Nine months into VAT, one area causes more questions than any other: input tax. Recovering the VAT you pay on business costs is what keeps VAT from becoming a cost to your business. Claiming it incorrectly is also one of the most common reasons for adjustments in an FTA review.
The basic rule
A VAT-registered business can generally recover input tax on goods and services it uses to make taxable supplies, whether standard-rated or zero-rated. To do so, it must:
- hold a valid tax invoice (or the appropriate import documents);
- have paid, or intend to pay, the supplier within the required time; and
- use the purchase for its business.
When input tax is blocked
Some costs carry VAT that cannot be recovered, even if they relate to the business. These include:
- certain entertainment services, such as hospitality provided to people who are not employees;
- motor vehicles that are available for personal use by employees; and
- goods and services provided to employees for their personal use free of charge, in many cases.
Exempt supplies reduce recovery
If your business makes exempt supplies, such as residential rents or certain financial services, input tax relating to those supplies cannot be recovered. Where costs relate to both taxable and exempt activities, the recoverable amount has to be apportioned, and the calculation reviewed at the end of the year.
Common errors
- Claiming VAT shown on a supplier’s pro-forma or quotation rather than a tax invoice.
- Claiming input tax on invoices addressed to another company in the group.
- Recovering VAT on staff entertainment or personal expenses that are blocked.
- Forgetting to reverse input tax when a supplier has not been paid within the required period.
Getting it right
Build simple checks into your purchasing process: confirm the supplier’s TRN, check the invoice details and code blocked expenses separately. A short review of your input tax claims each quarter is far easier than unwinding a year’s worth of errors during an audit.
If you would like us to review your input tax position, please get in touch.
This article is general information based on the rules as we understand them at the date of publication. It is not advice on your circumstances. Laws and practice change, so please speak to us before acting on it.
