VAT input tax: Be assertive and don’t underclaim

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In his final article on input tax, Neil Warren analyses how partly exempt businesses and not-for-profit entities must look at the ‘use’ of an expense and whether there is a ‘direct and immediate’ link to taxable supplies.


Input tax can only be claimed on an expense if it relates to ‘taxable supplies’: ie sales made by a business that is subject to VAT at 0%, 5% or 20%. In the case of international services that are outside the scope of VAT, under the place of supply rules (the place of supply for most B2B services is the customer’s country), a business can still claim input tax on related costs if the service would be VATable if supplied to a UK customer.

What is the best way to work out how much input tax can be claimed if a business has exempt income, non-business activities or private use? Four cases heard within the last few years will help our analysis:

Folkestone Harbour (GP) Ltd

A favourite VAT case of mine is about the construction of an impressive fountain outside a new property development in Folkestone (case: TC04306). The developer claimed input tax of £89,193 on the cost of building the fountain because it gave a good impression to potential punters about the quality of the development. HMRC disallowed the claim on the basis that the fountain was too far away from the site and therefore had no ‘direct and immediate link’ to taxable supplies. The court agreed with the taxpayer and allowed the appeal.

Durham Cathedral

I reported this fascinating case (TC05477) a year ago to illustrate the link between sales and expenses.

The taxpayer claimed that VAT paid on the costs of repairing a historic bridge could be partly claimed because it was an important route to the cathedral. HMRC disagreed and said that the bridge had no ‘direct and immediate link’ to taxable supplies made in the cathedral, namely book sales and a coffee/gift shop. The court supported the taxpayer saying: “Overheads are ipso facto components of the price of services, and that, contrary to the view of the UK in other cases, no enquiry into the way a person establishes the price for its goods and services is necessary.”

Queens Tennis Club

I wrote about this standout case (TC06119) quite recently. The issue was whether the cost of converting a café into a restaurant was partly linked to the exempt playing subscriptions to join this highly prestigious club, or only to taxable sales of food and drink. The tribunal agreed with the taxpayer that potential and existing playing members did not join the club to use the bars and restaurants. They were only attracted to the playing facilities at a world-class tennis club. So none of the exempt playing fees could be linked to the bar and catering activities and input tax could be fully claimed.


The CJEU verdict in the case of Sveda (C-126/14) encouraged Durham Cathedral to make its appeal. The issue was whether a path constructed in a public park and paid for by the taxpayer (which ran a café in the park) could be claimed for input tax purposes because it benefitted the café by increasing its takings. The tax authorities rejected the claim but the CJEU allowed the appeal. The interesting conclusion is that input tax could be claimed even though there was not an obvious ‘direct and immediate link’ between the path and the café. It was sufficient that it related to a ‘taxable economic activity.’


The challenge for tax advisers is to prove that there is no use or link between an expense and any exempt or non-business activities. This can be illustrated by looking at the purpose of the expense, for example the motivation behind Folkestone Harbour’s decision to build the fountain.

Alternatively, one may look at the customers’ behaviour, for example in the Queens Club case club membership applications actually increased while the members’ café was closed for refurbishment.

Advisers need to be assertive in order to ensure that input tax is not underclaimed as my four cases illustrate. The tax authorities do not always get it right!

About Neil Warren

Neil Warren

Neil Warren is an independent VAT consultant and author who worked for Customs and Excise for 14 years until 1997.


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