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HMRC internal manual

VAT Assessments and Error Correction

HM Revenue & Customs
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Demand for VAT: Recovering a debt to the Crown: Concessionary relief for VAT incurred by non registered supplier

In most cases involving the application of Schedule 11 paragraph 5(2), the VAT charged on an invoice will not be tax.

In such circumstances VAT on the invoice issuer’s own purchases or imports is not input tax as defined in the VAT Act 1994 section 24 and he has no entitlement to it.

However, where a supply has been made, exceptionally, and only where the supplier is neither registered nor required to be registered, you may, if certain conditions are met, allow the tax incurred on purchases directly related to the invoiced supplies to be treated as input tax.

Extra Statutory Concession No 3.9 (for the supplier concession) says

“Where an amount is shown or represented as VAT on an invoice issued by a person who is neither registered nor required to be registered for VAT at the time when the invoice is issued, the provisions of Schedule 11 paragraph 5 of the VAT Act 1994 (formerly Schedule 7 paragraph 6 of the VAT Act 1983) enable the Commissioners to require that person to pay an equivalent amount to them. The Act does not provide any relief in respect of related VAT incurred by such a person. On the grounds of equity, a person making such a payment may be permitted to deduct from it the amount of VAT incurred on supplies to him of goods and services that were directly attributable to any invoiced supply in respect of which such payment is required.”

You may only allow the tax incurred on purchases directly related to the invoiced supplies to be treated as input tax provided all of the following conditions are satisfied:

  • a supply has taken place
  • there is satisfactory evidence of the tax incurred
  • there is positive evidence of costing the supply on the tax-exclusive cost of the trader’s purchases
  • it does not exceed the amount recoverable under Schedule 11 paragraph 5(2), and
  • the claim does not include VAT on capital goods or petrol.

In many cases there will be no relief because the supplier will have completed each sales invoice by simply adding VAT to the total and not by costing the supply to take account of the tax-exclusive value of his own purchases.

Traders who anticipate registration, or have been invalidly registered, may be able to prove the basis on which they costed their supplies and so may be able to obtain concessionary relief. Approval of this concessionary relief is delegated to operational units.