VAT Director Rayner Essex
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VAT: Evidence required to reclaim

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When reclaiming input VAT the smallest misstep with a VAT invoice can cause problems that may have serious financial consequences for the business.

30th Nov 2021
VAT Director Rayner Essex
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The right to reclaim input tax is always on the basis that the costs incurred were for a taxable business purpose and crucially, that the business holds evidence to support that position.

The humble VAT invoice is usually the key document that a business possesses to prove the expenditure was incurred by the business, for a business purpose.

Input tax of £19,000 denied

The case of Mpala Mufwankolo (TC8308) concerns a sole trader who ran a pub in London. He was VAT registered and dutifully reclaimed input tax on the rent for the property. HMRC contended that the rental invoices were addressed to the taxpayer’s wife and that the lease was in her name. 

The taxpayer indicated that the VAT registration should have been a partnership. The taxpayer had queried the VAT registration status in 2013 (having being registered from December 2012) but had not pursued it to a conclusion and so it remained a sole trader registration.

The taxpayer held no invoices in his own name, he was unable to demonstrate that he was acting as a partnership, the lease was in the name of his wife. There was no supply from landlord to sole trader and no supply from his wife to himself as sole trader.

Other evidence?

Often in cases where the business does not hold an invoice addressed to them, HMRC will often accept other forms of evidence to demonstrate that the supply was made to the business.

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Replies (14)

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By Paul Crowley
30th Nov 2021 16:38

I told my former partners numerous times that the issue that will cause a PII claim will be VAT and property. I still hold that view. You get one chance to get the property VAT done correctly.
Nearly everything else for an accountancy practice can be fixed with a bit of effort.

I would probably now add not asking who owns the property for landlords.
For so many the husband declares the total for jointly owned property

Thanks (2)
Replying to Paul Crowley:
Jason Croke
By Jason Croke
30th Nov 2021 16:55

Agree, VAT and property is a nightmare and even an excellent accountant wouldn't necessarily have seen the problem or even been aware of it but you can be sure the taxpayer will be blaming their accountant.

You get similar in farming partnerships and other family run businesses where the husband declares everything for convenience purposes but its not always his to declare.

I thought the case was interesting and a little frustrating because HMRC could clearly see what was going on, nothing fraudulent or dodgy, but the rules are clear and HMRC don't deviate if they've got the law on their side....and is why i wanted to highlight the importance of the really simple stuff like who the invoice is addressed to and who receives the supply.

Thanks (3)
Replying to Jason Croke:
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By Paul Crowley
30th Nov 2021 20:38

As always
HMRC consider rules is rules despite harshness and unintended consequenses
When it suits their purposes

But rules is not rules and we need to look at intension of Parliament
When it suits their purposes

Thanks (2)
Replying to Paul Crowley:
paddle steamer
By DJKL
30th Nov 2021 16:57

I caught one of the rental ones years and years ago.

Husband declared rental on his return (to his detriment I should add as he was an HR taxpayer and his wife was not) because in the days of election for separate taxation of husband and wife that is what he had always done (it was I think only the earned bit that was split) and nobody with his accountants (a larger firm I hasten to add) had stopped to ask who actually owned the property; in the case in question it was his wife.

Thanks (2)
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By Hugo Fair
30th Nov 2021 16:55

A salutary tale indeed, Jason ... with a moral dimension and lessons for the future.
Are you moonlighting as the Charles Dickens of our (taxing) times?

Thanks (2)
Replying to Hugo Fair:
paddle steamer
By DJKL
30th Nov 2021 16:58

Our Hard Times, perhaps.

Thanks (2)
Replying to DJKL:
Universe
By SteveOH
01st Dec 2021 09:34

Definitely not Great Expectations.

Thanks (2)
Tornado
By Tornado
30th Nov 2021 17:41

It costs £3 online and about 5 minutes at the Land Registry to check who owns property or leases. I always do this as a matter of course for any matters related to property but bearing in mind that the details at the Land Registry do not always take into account any private arrangements that may not have not been filed.

Thanks (0)
Replying to Tornado:
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By Paul Crowley
30th Nov 2021 20:34

I did the same when client explanations did not fit with paperwork
This time client was correct and the paperwork was adrift

Thanks (0)
Replying to Tornado:
paddle steamer
By DJKL
08th Dec 2021 16:58

Of course all property may not be on the Land Register (well certainly up here in Scotland), my house is not on it as we purchased it in 1997 pre Register and have never remortgaged it giving rise for a need for first registration.

Up here you can view the Cadastral map and see which properties are "shaded" and which are not.

Thanks (0)
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By Ben Alligin
02nd Dec 2021 10:26

Why didn't they use an app or some of the new MTD-VAT software? The problem would then never have arisen according to HMRC!!!!!!!!

Thanks (1)
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By Springfield
02nd Dec 2021 11:52

For HMRC, VAT is the gift that keeps on giving. As others have said here often it's a fiendishly complicated form of taxation with little opportunity to put things right and every business, from the unwary to the most cautious can fall into one of its many traps at any time.

In this case I feel the principle of "Unjust enrichment" arises. HMRC have collected the output tax from the landlord and if they pay it back as input tax then they've lost nothing other than the opportunity to take something that, under equity, they shouldn't. Cake and eat it I think.

Thanks (1)
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By Roland195
02nd Dec 2021 12:15

I know that as a qualified professional & upstanding citizen, I am supposed to take the view of hell mend the client for his poor approach to record keeping and that HMRC are only doing their job in applying the law but I can't seem to care - it's a horribly unfair outcome that was likely only taken this far by HMRC as it's an easy win.

We must be able to accept that for a client to be able to operate a licensed, public house, he must have had legal access to that physical building named on that license. There must have been some relationship between the takings & the money deposited in the wife's account for the rent?

Thanks (2)
Replying to Roland195:
Jason Croke
By Jason Croke
06th Dec 2021 15:52

As I noted in my article, HMRC's approach was not resting easily with me either, although HMRC were well within their rights of course.

Even more painful was that the husband was a sole trader, so even though the business is long dead and his VAT registration long cancelled, he is still personally liable for the VAT.

A prime example why businesses should always consider its legal form (sole trader/Limited) when starting out. If he had been a Limited company, HMRC would have had no recourse, the debt stays with the Limited.

Thanks (1)