Input tax

In order to claim input tax your business must overcome a number of hurdles: you must be charged VAT by a registered business at the correct rate; the expense must be for the purpose of your business; and you must hold evidence to support your claim, usually a VAT invoice. If you fail to meet these conditions, HMRC has the power to disallow your claim. The officer’s power of assessment extends to the previous four-year period.

In the absence of a VAT invoice, you can support your claim by producing a bundle of other evidence to show that you have paid VAT to a registered supplier in good faith for an expense that relates to your business. The expense must relate to your taxable business activities, i.e. linked to your sales subject to 0%, 5% or 20% VAT. If it partly or wholly relates to any of your exempt activities, you will need to reduce your claim under the rules of partial exemption.

Deregistration

There have been many situations when HMRC has cancelled VAT registration numbers because of a “missing trader” situation, e.g. a business moves premises and fails to tell HMRC. This can cause confusion because the business might still think it is registered and be charging VAT on its sales invoices. You need to be alert to such situations - it’s usually a case of carrying out due diligence checks so that you know your suppliers are reliable.

It’s also important to make sure that your own business details with HMRC are always up to date. You can make changes online in most cases.

Extra statutory concession

There is a potential “get out of jail” card if HMRC seeks to issue you with an assessment for overclaimed input tax on invoices issued by your unregistered supplier(s).

To ensure fairness in the tax system, HMRC has introduced a number of extra statutory concessions (ESCs) since VAT was introduced. Many of these have been withdrawn because HMRC’s power to override the legislation has been reduced by binding Tribunal cases. However, there is an important concession in VAT Notice 48.

This confirms the power given to HMRC to pursue a supplier for the VAT charged on their sales invoices and not declared on a return because they are not registered. The VAT they owe is described as a debt to the Crown. However, HMRC will allow you to claim input tax on these supplies as long as you “treated such an amount as input tax in good faith” .

You should emphasise to the officer that the ESC is intended to ensure that taxpayers who have acted honestly - like your business - are not penalised. Your input tax claim should be allowed on “the grounds of equity”. Make sure that the officer chases the supplier for the VAT and not your business!