When a VAT-registered business purchases goods or services for use in its taxable activities, the VAT it pays on those purchases is known as input tax. Reclaiming input VAT is how the system ensures that VAT is ultimately borne only by the end consumer rather than by businesses in the supply chain.Â
For businesses that charge more VAT on their sales than they pay on their purchases, reclaiming input VAT reduces the amount owed to HMRC. Where input VAT exceeds output VAT, the business is entitled to a refund.
Who Can Reclaim Input VAT
Only VAT-registered businesses can reclaim input VAT on items they buy for use in their business. The reclaim is made through the VAT return.Â
Businesses that supply only VAT-exempt goods or services cannot register for VAT and therefore cannot reclaim any input tax. This is a critical distinction between exempt and zero-rated supplies. A business making zero-rated sales can register for VAT and reclaim input tax, because zero-rated supplies are taxable supplies charged at 0%. A business that makes only exempt supplies cannot register or reclaim.
Certain non-registered bodies, such as local authorities, academies, some public bodies and eligible charities, may be able to recover VAT under the VAT126 scheme.
The Basic Rule to Reclaim Input VAT
A VAT-registered business can reclaim input VAT on items purchased for use in its business, provided those items relate to VAT taxable goods or services that the business supplies. VAT on purchases for personal or non-business purposes cannot be reclaimed.
Where an item is used partly for business, and partly for personal purposes, only the business proportion of the VAT can be recovered. Records must be kept to show how that proportion was calculated, and valid VAT invoices must be held to support every claim.
HMRC gives two examples.
Where half of a mobile phone’s calls are personal, 50% of the VAT on the purchase price and the service plan can be reclaimed.
Where a home office occupies 20% of a property’s floor space, 20% of the VAT on utility bills may be recoverable.
VAT Invoices in Input VAT Reclaim
Valid VAT invoices must be held to support input VAT claims. For supplies of £250 or less including VAT, a simplified invoice may be used. A simplified invoice must include the supplier’s name, address, and VAT registration number; the time of supply; a description sufficient to identify the goods or services supplied; the total amount payable including VAT; the VAT rate applicable; and, where more than one rate of VAT applies, the gross amount payable including VAT for each rate shown separately. A simplified invoice must not include any exempt supplies.
Purchases Before VAT Registration
VAT paid on purchases made before VAT registration can be reclaimed, subject to time limits:
- Goods the business still has, or goods used to make other goods it still has: four years before registration
- Services: six months before registration
The purchases must relate to the business now registered for VAT and must relate to its taxable activities.
Partly Exempt Businesses
Where a business makes both taxable and exempt supplies, it is treated as partially exempt. It cannot ordinarily reclaim the VAT it incurs on costs that relate to its exempt activities. However, an exception applies where the amount of exempt input tax is sufficiently small — a threshold known as the de minimis rule.Â
To qualify, two conditions must both be met at the same time: the total exempt input tax must be no more than £625 per month on average, which is equivalent to £7,500 per year, and that same exempt input tax must amount to no more than 50% of the total input tax incurred in the period. Where both conditions are satisfied, the business is treated as fully taxable for that period.
It may reclaim all of its input tax, including VAT that would otherwise be blocked by reason of its connection to exempt supplies. If either condition is breached, even by a small amount, the de minimis rule does not apply, and the exempt input tax becomes irrecoverable in its entirety for that period.
Specific Categories of Expenditure
Vehicles
A business may be able to reclaim all the VAT on a new car or commercial vehicle if it is used only for business. The business must be able to show that it is not used for personal purposes, for example, this is specified in the employee’s contract. Personal use includes travelling between home and work, unless the place of work is temporary.
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All the VAT on a car may also be reclaimable if the car is a qualifying car and is intended to be used primarily as a taxi, for driving instruction, or for self-drive hire. A qualifying car is one on which a previous owner has recovered the input tax in full on the original purchase, sold on a normal tax invoice with VAT charged on the full selling price.
If a car is hired to replace a company car that is off the road, 50% of the VAT on the hire charge can usually be claimed. If a car is hired for business use only, all the VAT can be reclaimed if the hire period is no more than ten days.
Vehicle Running Costs and Accessories
A business may be able to reclaim all the VAT on a new car or commercial vehicle if the car is used exclusively for business purposes and is not made available for the private use of any employee or any other person. A car is used exclusively for business purposes where it is used only for business journeys and is not available for private use.
A car is considered available for private use whenever there is nothing preventing an employee or any other person from using it privately. The fact that a car was purchased for business purposes is not the only requirement the business must ensure the car is not made available to anyone else. Personal use includes travelling between home and a permanent workplace. Travel to a temporary workplace does not count as personal use.
Fuel
Where a vehicle is used for both business and personal purposes, HMRC sets out three options for recovering VAT on fuel.Â
- First, the business can reclaim all the VAT on fuel and pay the appropriate fuel scale charge for that vehicle. The scale charge is a fixed output tax based on the vehicle’s CO2 emissions, designed to account for the private-use element without requiring detailed record-keeping.Â
- Second, where a business does not wish to apply the fuel scale charge, it can instead reclaim only the VAT attributable to business trips, provided it maintains detailed mileage records to demonstrate the split between business and private use.Â
- Third, a business may choose not to reclaim any VAT on fuel at all. Where a business takes this third option, that is, it chooses not to enter the fuel scale charge regime and not to maintain detailed mileage records, the decision not to reclaim applies to all road fuel bought by the business, regardless of whether that fuel is used in cars or commercial vehicles. It is not possible to disapply the rule selectively for individual vehicles
Travel Expenses
Whether VAT can be reclaimed on a used car depends entirely on how it was sold. Many second-hand cars are sold by dealers under the VAT margin scheme, under which VAT is not separately stated on the invoice, and no input tax is recoverable by the buyer.Â
Only where a used car is sold as a qualifying car, meaning a previous owner recovered the input tax in full on the original purchase and the dealer charges VAT on the full selling price, shown separately on the invoice, can the buyer consider a claim, subject to the same exclusive business use conditions that apply to new cars.
Business Entertainment
VAT cannot be reclaimed on the cost of entertaining or providing hospitality to people a business does business with, for example, theatre or sports tickets.
The Flat Rate Scheme
Businesses on the VAT Flat Rate Scheme cannot reclaim VAT on their purchases, except where a business makes a single purchase of capital expenditure goods costing £2,000 or more, including VAT. The exception applies only to goods and services that do not qualify regardless of their value, and separate purchases cannot be combined to reach the £2,000 threshold.
The Capital Goods Scheme
Where a business acquires or creates a significant capital asset, the Capital Goods Scheme may apply. Under this scheme, the amount of VAT initially claimed is reviewed and potentially adjusted over several years if the proportion of taxable use changes.
The assets covered and the thresholds, all measured net of VAT:
- Land, buildings, and civil engineering work: £250,000 or more
- An individual computer or item of computer equipment: £50,000 or more. This applies to a single item, not a network where the total cost of combined items reaches £50,000. Computer software and computerised equipment, such as a computerised telephone exchange or computer-controlled blast furnace, are not included.
- Aircraft, ships, boats, and other vessels: £50,000 or more
VAT Notice 706/2 confirms the adjustment periods. These are five intervals for computers, five intervals for ships and aircraft, and ten intervals for all other capital items, including land and buildings. If the proportion of taxable use increases during the adjustment period, more VAT can be reclaimed. If it decreases, some of the VAT originally reclaimed must be repaid.
The scheme does not apply where assets are acquired solely for resale or used wholly for non-business purposes.
What Cannot Reclaim for Input VAT?
Input VAT cannot be reclaimed on:
- Anything used only for personal use
- Goods and services used to make VAT-exempt supplies
- Goods sold under one of the VAT second-hand margin schemes
- Business assets transferred as a going concern
How to Make the Input VAT Claim?
Input VAT is reclaimed through the business’s VAT return. No separate form is required under normal circumstances. Records must be kept to support every claim, and valid VAT invoices must be retained and made available if HMRC requests them.
Conclusion
Reclaiming input VAT correctly requires a VAT-registered business to identify which purchases relate to its taxable activities, hold valid VAT invoices for each claim, apply the correct rules for restricted categories such as motor cars and business entertainment, and report the right figures on its VAT return each period. Where a business makes both taxable and exempt supplies, partial exemption rules determine how much input VAT can be recovered. Where significant capital assets are acquired, the Capital Goods Scheme introduces an ongoing review obligation that lasts up to 10 years.
The rules are consistent, but the exceptions are numerous. Where a business is uncertain about the VAT treatment of a particular purchase, professional advice should be sought before making a claim, as errors can result in penalties and interest on amounts incorrectly reclaimed.
