VAT input tax: HMRC can correct errors

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In the second part of his series on input tax issues, Neil Warren considers when HMRC may raise assessments to correct errors. They have a four-year window in which to do so.

Private or non-business use

If an expense has a part private or non-business purpose, then the VAT relevant to this part is not classed as input tax and must be excluded from any claim. The legislation does not prescribe a specific method for apportionment of the cost but it must be made on a fair and reasonable basis (VAT Notice 700, section 32).

Going back a number of years, the legislation allowed a wider use of the Lennartz principle, where input tax could be fully claimed on the purchase of an item but then output tax was accounted for in future periods to adjust for any private or non-business use. Now the principle of input tax apportionment is firmly embedded in the VAT regulations and Lennartz applications are very rare.

Purpose v benefit

Many clients can be over-optimistic about what expenses relate to their business. A key word in the legislation is that an expense must be for the ‘purpose’ of the business in order for input tax to be claimed (VATA 1994, s 25). This is very different to the question of whether an expense has a business ‘benefit’ – a benefit alone is not enough to justify an input tax claim.

Example

Bob the builder is a member of Longrow Golf Club. He has claimed input tax on his annual membership fee on the basis that he gets a lot of work from fellow members that he meets either on the course or in the clubhouse bar. The membership clearly has a business benefit for Bob. But the purpose of the expense is because he enjoys playing golf. An input tax claim is therefore incorrect.

Note: Longrow Golf Club is a commercial club rather than non-profit making club run by a committee appointed by the members. Playing fees for non-profit making clubs are exempt from VAT.

Non-deductible items

The two most common claims that HMRC officers disallow relate to business entertainment of non-staff, and motor cars that are available for private use. Here are some practical tips:

Staff entertainment

The HMRC officer will often ask whether the role of staff was to entertain the guests at an event, where both staff and non-staff are in attendance. If there is a hosting role for the staff, then input tax is also blocked on their costs as well.

There is a window of opportunity to claim input tax on the cost of entertaining overseas customers but only if the expenditure relates to a business meeting and the hospitality provided is ‘reasonable in scale and character’. (VAT Notice 700/65, para 2.6)

Cars for private use

The motor car test of ‘availability’ is very different to that of actual use. It is not good enough for a director to produce a mileage log confirming his vehicle has been used 100% for business trips since it was bought and has never been used for private journeys. If there is no physical restriction in place to prevent a private journey, eg an insurance policy that prevents private use, or a strongly worded contract of employment preventing private use that is enforced in practice, the car will be deemed to be available for private use.

The issue of claiming input tax on cars is all about the availability at the time of purchasing the vehicle, the actual use in the future is a red herring. However, HMRC accepts that input tax can be fully claimed on a car used as a tool of trade by either a taxi business, driving school or car hire business, even where there is some private use of the vehicle.

Property developers

Property developers can’t claim input tax on ‘white goods’ or moveable items they supply as part of a new dwelling. White goods include: washing machines, dishwashers and fridges; moveable items would include carpets, and furniture but not wood flooring, which is fixed in the building, see VAT Notice 708, sections 12 and 13.

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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