Silvergum Solutions Limited – Recovering VAT on expenditure

In the recent Tribunal case the above business lost a claim for input tax because the purchases made were actually used by an associated business.  That business was partially exempt therefore would have been unable to recover all the VAT incurred.  This case is a reminder of the basic points concerning input tax deduction and is often an issue for associated businesses.  For VAT incurred on expenditure to be recoverable the main criteria are:

– Have been purchased by a taxable entity.

– Relate to an actual purchase of goods or services.

– The VAT recoverable is the amount properly chargeable and may be different from the amount actually charged.

– The purchased goods or services must have been supplied to the entity recovering the input tax.

– The purchase must have been incurred for the purpose of the business and not restricted (blocked or attributable to exempt supplies)

– A valid purchase invoice must be held.

A business will often recover the VAT on a purchase invoice and not take into consideration the above factors.  However a business should always consider whether the VAT being recovered is correct to this or an associated business.  As the fundamental principle of VAT recovery is that a purchase must be attributable to a taxable supply this issue can often be corrected with a cross management charge.  However, as is the case above, if the associated business is partially exempt there may be the issue of the VAT charged on the management charge only being partly recoverable.  A possible further solution is the setting up of a VAT group, if the criteria are met to set up a VAT group no VAT is chargeable on supplies made between VAT group members. As always, it’s important to consider the wider implications before making any changes to VAT systems.

If you would like some more advice on this topic, please contact the VAT specialist team on 01772 821021.