Do you know when input tax is non-deductible?

In this post, we help you when input tax is non-deductible

Your business will incur input tax when it purchases goods and services.

Being registered for VAT and making taxable supplies allows much of this to be reclaimed, but when are you prevented from recovery? When is input tax non-deductible?

A VAT registered business can recover the VAT on the purchase of goods and services that relate to its taxable business activities. Purchases relating to exempt business activities, non-business activities (mostly relevant to charities) or for private use are not classed as input tax and cannot be reclaimed.

The amount of VAT that can be reclaimed is that which should have been charged, not the amount actually charged if higher. Therefore, if you are charged 20% VAT on a supply that should have been at the 5% lower rate, you are only entitled to claim back the 5%. In addition to this, certain input tax is blocked by legislation.

Business Entertainment

The recovery of VAT on entertaining business contacts is specifically blocked.

However, this does not extend to the recovery of VAT on staff entertainment providing it’s undertaken for the benefit of the staff e.g. to reward them for good work or to maintain or improve staff morale. Where there is a mix of staff and non-staff, the recoverable VAT is apportioned.

It might sound a bit mean but a token charge to your guests can produce large VAT savings.

This is because the input block on entertaining is longer relevant as you are not providing “free” hospitality.

The charge can be less than the cost of the food and drink provided to the guests. For example, your Christmas party costs £75 per head plus £15 VAT. Your guest list includes 20 important clients. By default the £300 VAT on their costs would be blocked from recovery.

However, you charge them a token amount of £6 each you will to account for output tax of £1 each on this, but you can reclaim the £300 – an overall saving of £280.

The charge must be compulsory for this to work. For example it can’t be a voluntary donation which you pass on to charity.

Motor cars

The input tax on the purchase of cars that have any private used is blocked. Therefore, the VAT on cars with 100% business use, such as stock in trade cars for car dealers, taxis, driving schools, hire cards, pool cars etc. can be reclaimed.

The input tax on the installation of certain accessories in cars is also blocked. Input tax on accessories would only be allowed if your business owned the car and the accessory was for business use.

Builders

If you are residential building contractor, you can recover input tax on the purchase of building materials. However, the VAT on furnishings, white goods, etc cannot be recovered.

Evidence

In addition to these specific restrictions you will need to obtain a valid VAT invoice to substantiate any claim for input tax. Input tax cannot be claimed if it was incurred on an invoice dated more than four years before the VAT period in which you are trying to claim it.