Businesses must overcome several hurdles in order to claim back input tax: it’s not just as simple as having a purchase invoice. Any input tax claimed by a business must relate to a supply that has Actually taken place.

Claim what should have been charged

You can only claim the amount of VAT that is properly chargeable, and not what has actually been charged where this is different. This can give rise to a number of problems. If a supplier wrongly calculates VAT and charges too much, only the lower, correct amount can be reclaimed.

Example 1: Incorrect VAT rate

A builder wrongly charges VAT at the standard rate on a supply that should have been charged at the 5% lower rate. The customer can only reclaim the 5% VAT that should have been properly charged even though they have paid VAT at 20%. In these circumstances, a business should go back to its supplier and ask for a credit note for the wrongly charged VAT.

Where an unregistered trader shows VAT on an invoice, this is not input tax and cannot be reclaimed. However, by concession HMRC may allow a claim in these circumstances if certain conditions are fulfilled:

• The recipient of the supply is neither involved in nor has close knowledge of the supplier’s business.
• It was reasonable for the recipient to consider that VAT had been lawfully charged.
• The claim is made in respect of goods or services genuinely supplied at the stated value.

Only the recipient can claim the VAT

Only the recipient of the supply can actually reclaim the VAT charged.

Example 2: Due diligence costs

A business approaches its bank for a loan. The bank hires accountants to perform a due diligence check on the business to see if it is creditworthy. The business has to pay for the due diligence check but can’t reclaim the VAT as the actual supply is to the bank.

The supply must be for the business

Input tax can only be reclaimed on supplies for a business purpose. So, if a business owner is prosecuted for dangerous driving and puts the costs of a lawyer through its business, it cannot reclaim the VAT as it is a personal matter and not for a business purpose.

And finally!

The final hurdles to overcome are that the input tax on the supply must not be subject to a statutory block. For instance, where a business purchases a car including for private use or buys goods on a second-hand margin scheme or for business entertainment, input tax recovery is not allowed.