From a business’ point of view, the best part about the VAT system is the ability to recover VAT paid on purchases. From HMRC’s point of view, this is the aspect which requires policing most closely.
The result is a battleground between businesses pressing for an efficient system for recovering input VAT and HMRC requiring a high standard of evidence to support claims for repayments.
Past cases show how difficult it can be for a business to ensure it has sufficient evidence to support its input VAT claims.
In Future Phonics Ltd v Revenue & Customs Commissioners ( UKFTT 169 (TC), published on 20 March 2013), the taxpayer had claimed £1.3m of input VAT on its purchases. HMRC rejected this and argued that the purchase invoices did not describe the goods supplied.
The Tribunal heard evidence that the actual weight of the goods recorded by the transporter was less than it should have been according to the purchase invoice (i.e. multiplying the standard weight of the item described in the purchase invoice by the quantity stated in the purchase invoice). The Tribunal concluded that, whatever had been supplied, it was not what had been recorded on the purchase invoice. The taxpayer therefore lost its case and failed to recover £1.3m of input VAT.
This case demonstrates the extremes to which HMRC will go if the evidence to justify an input VAT claim is not in place.
There are various rules governing claims for input VAT. For instance, input VAT must be claimed within four years, the appropriate forms should be used, adequate due diligence must be carried out, and so on. These rules are now set out below.
What qualifies as input VAT?
HMRC’s policy is that a business has incurred input VAT if the following conditions are met:
- There has actually been a supply of goods or services;
- That supply takes place in the UK;
- It is taxable at a positive rate of VAT;
- The supplier is VAT registered in the UK;
- The supply is made to the person claiming the input VAT;
- The recipient is VAT registered at the time the tax was incurred; and
- The recipient intends to use the goods or services for their business purposes.
What is required to evidence an input VAT claim?
HMRC will only repay input VAT to a taxpayer if it holds:
- A valid VAT invoice, or
- Acceptable alternative documentary evidence.
What is a valid VAT invoice?
A standard VAT invoice should contain the following:
- An identifying number, from a series that is unique and sequential;
- Time of the supply (tax point);
- Date of the issue of the invoice;
- Name, address and registration number of the supplier;
- Name and address of the person to whom the goods or services are supplied;
- A description sufficient to identify the goods or services supplied;
- For each description,
- Quantity of the goods or the extent of the services
- Unit Price
- Rate of VAT
- Amount payable, excluding VAT, expressed in any currency;
- Gross total amount payable, excluding VAT, expressed in any currency;
- Rate of any cash discount offered;
- Total amount of VAT chargeable, expressed in sterling.
To be valid, a VAT invoice should also contain no false information. In practice, HMRC expects the taxpayer to have undertaken due diligence to a reasonable level, such as a check that the supplier’s VAT registration number is valid.
What is alternative evidence?
HMRC will accept alternative evidence if they are persuaded of the following.
- The supply as stated on the invoice did take place.
- There is other evidence to show that the supply occurred.
- The supply made is in furtherance of the trader’s business.
- The trader has undertaken normal commercial checks to establish the bona fide of the supply and supplier.
- Normal commercial arrangements are in place- this can include payment arrangements and how the relationship between the supplier/buyer was established.
HMRC suggests that the taxpayer should be able to answer most of the following.
- Do you have alternative documentary evidence other than an invoice (e.g. supplier statement)?
- Do you have evidence of receipt of a taxable supply on which VAT has been charged?
- Do you have evidence of payment?
- Do you have evidence of how the goods/services have been consumed within your business or their onward supply?
- How did you know that the supplier existed?
- How was your relationship with the supplier established? For example:
- How was contact made?
- Do you know where the supplier operates from (have you been there)?
- How do you contact them?
- How do you know they can supply the goods or services?
- If goods, how do you know the goods are not stolen?
- How do you return faulty supplies?
There are also special rules, such as (but not limited to) the following.
- Businesses can claim VAT on purchases made prior to VAT registration. Restrictions apply.
- Retailers can issue “less detailed” VAT invoices for individual supplies of £250 or less (inclusive of VAT).
- There are additional requirements for invoices relating to cross-border supplies, such as the customer’s VAT registration number (if any) and a reference explaining why no VAT charge is shown (where appropriate).
- The input VAT on certain expenses addressed to employees can be claimed.
- An original C79 is required to support a claim for import VAT.
The sheer quantity of these rules shows how complex it can be to ensure the evidence is sufficient to justify an input VAT claim. Checks range from the validity of the VAT invoice to the due diligence performed on the supplier.
It is best practice for taxpayers not to claim input VAT until they hold a valid VAT invoice. This often means deferring an input VAT claim until a correct and valid VAT invoice is received from the supplier.
However, if the amounts are significant or if the supplier refuses to issue a valid VAT invoice, it is worth considering the special rules for claiming input VAT when the purchase invoice is not valid.
For further information on claims for input VAT, including valid VAT invoices and other requirements, please contact the TaxDesk on 0845 4900 509 and ask for Kevin Hall.