VAT Input Tax basics: is the expenditure for a business purpose?
UK law says that VAT must be incurred in furtherance of the taxable person’s business before it can be treated as input tax. A taxable person is someone who is registered or who is required to be registered for VAT.
This potentially broad test can lead to disputes over input tax claims. Lists of goods or services which are accepted as being for the purpose of a taxable person’s business cannot be made. Neither can lists of goods or services which are definitely not accepted as being received for a business purpose. Sometimes you will need to think about why the purchase has been made before deciding whether input tax can be claimed.
VAT does not automatically become input tax simply because it has been incurred by a VAT registered person. People do not always think about this when they make a claim. Some businesses have ended up in dispute with HMRC because they have tried to claim input tax on activities that fall outside the boundaries of their business.
Typical examples of where claims could be made that do not satisfy the purpose of the business test include:
- costs related to domestic accommodation;
- costs in the pursuit of personal interests such as sporting and leisure orientated activities;
- spending for the personal benefit of company directors, proprietors, partners; and
- spending in connection with non-business activities.
There is no absolute definition of business purpose. It would be totally inappropriate to offer a definition given the wide variety of circumstances in which businesses operate. Only in a very limited number of cases does the law give a definition of activities covered by the term ‘business’ for VAT purposes. These are set out in section 94 of the Value Added Tax Act 1994 - see VAT Business/Non-Business VBNB15000 and VAT Business/Non-Business VBNB24000.
In most cases the connection between the goods or services bought and the business purpose is clear. No further explanation is needed in these cases.
Where the connection between the expenditure and the business purpose is not clear it is up to the person claiming input tax to explain how the purchases in question play a valid part in their business. When checking a claim HMRC staff may have to think about:
- the intent of the business when making the queried expenditure. This is a subjective test which requires the officer to look into the mind of those running the business at the relevant time to determine their objective; and/or
- whether there is a clear connection between the actual or intended use of the queried goods or services and the activities of the business. In other words, think about what the business does to earn income. This is an objective test of the use to which the goods or services are put. See VIT21000 for more about the link between purchases and supplies.
HMRC will normally accept that the VAT incurred is input tax if we are satisfied that:
- the expenditure was genuinely made for the purpose of the business;
- the expenditure was not made for private or other non-business purposes; and
- the use to which the purchases are put is an acceptable business use.
If HMRC considers that the business use test is not satisfied we will normally reject the claim because the VAT is not input tax.
It is helpful in cases where there may be doubt if a business gives an explanation about the potential business use. We will usually record the explanation to make it easier to resolve any subsequent disputes.