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Input tax
Computers provided by employers
See VM ¶1868
HMRC has announced a change of policy effective from 13 August 2007, so that full input tax recovery (without any adjustment for private use) is no longer allowed.
Where the provision of a computer is necessary for the employee to carry out the duties of his employment, so that any private use is insignificant when compared with the business need for providing the computer in the first place, an employer will be able to recover all of the input tax incurred.
Otherwise, where a business cannot demonstrate such a necessity, only a portion of the input tax incurred will be recoverable. For this purpose, HMRC will accept any method of apportionment so long as the result fairly and reasonably reflects the extent of business use.
There is transitional relief, so that full input tax recovery can still be made on a computer which was provided by an employer under an agreement which existed before 6 April 2006.
HMRC Brief 55/07
Football agency fees
See VM ¶1958
The High Court has held that the tribunal misdirected itself when finding that a football club was not the recipient of a supply for which it had paid.
The case has been remitted back to the tribunal for a finding of fact, which gives the football club an opportunity to give further evidence to support its case that it should be able to deduct input tax on agent fees.
Newcastle United plc v HMRC [2007]
Valid VAT invoices
See VM ¶1982
HMRC have updated their policy relating to input tax claims which are not supported by a valid VAT invoice, effective from 10 April 2007.
For the majority of businesses, the position is unchanged, so that in the first instance a trader should ask his supplier for a revised invoice which does actually comply with the VAT rules (¶2840+). If this is not possible, providing the trader carried out normal commercial checks to review the legitimacy of the supplier, an input tax deduction may be allowed at the discretion of HMRC. In addition, the trader should ensure he can provide other supporting evidence where possible. Note it is possible to check a supplier's VAT registration details (i.e. to ensure a false name etc is not being used) by contacting HMRC.
For traders receiving supplies involving the following, a higher level of proof is required to support the contention that a valid supply has occurred (see ¶1994):
- computers and any other equipment, including parts, accessories and software, made or adapted for use in connection with computers or computer systems;
- telephones and any other equipment, including parts and accessories, made or adapted for use in connection with telephones or telecommunications;
- alcohol which is subject to excise duty; and
- all oils that are held out for sale as road fuel.
As a minimum, HMRC would expect a trader to be able to produce most of the other types of evidence listed below.
Memo points Other supporting evidence that HMRC would take into account include:
- alternative documentary evidence held (e.g. the supplier's statement of account);
- evidence of receipt of a taxable supply;
- evidence of payment;
- evidence of how the supply has either been consumed by the trader, or incorporated into his own supplies; and
- an explanation of how the trader came to be aware of the supplier and what knowledge he possesses about his business.
HMRC Brief 36/07
SP “VAT Strategy: Input Tax deduction without a valid invoice” March 2007
Theatres and residual input tax
See VM ¶2100
Following the decision of the Court of Appeal in the Mayflower case, HMRC have revised their policy relating to input tax recovery on production costs when a theatre's admissions are VAT exempt.
Bought-in production services
Theatres which receive supplies of production services from touring companies that include material essential for the printing of programmes (even if a minor element) may treat the input tax as residual.
When using the standard method, an over-recovery of input tax may result where larger theatres have substantial residual production costs which are used almost entirely for exempt admissions with only a minimal link to taxable programmes. In this case, the standard method override should be applied (¶2240), or a special method could be agreed with HMRC (¶2142).
If theatres are able to claim further input tax as result of this change in policy, they must use the partial exemption method in place when the input tax was incurred. Exceptionally, an alternative method may be used with the agreement of HMRC. All claims are subject to the usual 3 year cap (¶2014).
Theatres staging their own shows
Supplies such as costumes or scenery are not residual, because they have a direct and immediate link with exempt admissions. Any input tax incorrectly claimed up to now will be recovered by HMRC via assessment, and interest will be due.
HMRC Brief 45/07
Hire purchase businesses
See VM ¶2106
HMRC have announced a policy, effective from 1 April 2007, in respect of the input tax recovery on overheads incurred by traders who make supplies under hire purchase (HP) agreements with consumers.
They say that the overheads are purely cost components of the exempt supply of credit.
However, where overheads are used to make both HP transactions and other supplies on which VAT is charged (such as taxable purchase option fees or sales of repossessed goods), then some VAT on overhead costs is recoverable. In this case, the partial exemption method should reflect the extent to which the overhead costs are a cost component of each particular supply.
HMRC state that traders who are using a special method will need to review it in light of this policy. If an existing method is not fair and reasonable, the trader should contact HMRC to discuss a new method going forward.
HP businesses using the standard method will need to consider the standard method override provisions and, if necessary, apply for a special method.
As an aside, HMRC also discuss a recent case which treated HP agreements as two transactions, one taxable and one exempt, so that 50% of the VAT on related overhead costs would be recoverable. HMRC lost this case although they will appeal.
HMRC Brief 31/07
Royal Bank of Scotland Group plc (No.7) [2007] (VTD 19983)
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