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HMRC internal manual

VAT Input Tax

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VAT Input Tax basics: impact of the decision in Flockton

The High Court decision in Ian Flockton Developments Ltd (see VIT61080) was very significant. It introduced the subjective test as a factor in working out whether a cost has a business purpose.

The Flockton decision is sometimes referred to when HMRC is not convinced by claims for business use. Please note that the Flockton decision is not an authority to allow input tax recovery which would otherwise be disallowed.

The decision made clear that HMRC has to check claims where a purchase could be used for social as well as business reasons. The decision also made clear that in such cases HMRC should not accept the evidence without question.

The Court pointed out that:

”…….. the tribunal should approach any assertion that it is for the taxpayer company’s business with circumspection and care, and must bear in mind that it is for the taxpayer company to establish its case and the tribunal should not accept the word of the witness, however, respectable. It is both permissible and essential to test such evidence against the standards and thinking of the ordinary business man in the position of the applicant. If they consider that no ordinary business man would have incurred such an expenditure for business purposes that may be grounds for rejecting the taxpayer company’s evidence, but they must not substitute that as the test. It is only a guide or factor to take into account when considering the credibility of the witness, and no doubt there will be many other factors which bear on that question which the tribunal should well understand.

The tribunal must look at all the circumstances of the case and draw such inferences as they think fit. In the end it is a question of fact for them whether they were satisfied on the balance of probability that the object in the taxpayer company’s mind at the time the expenditure was incurred was that the goods and services were to be used for the purposes of the business.”

VAT on costs is not input tax simply because it is believed that the purchase was for a business purpose. See VIT10600.

It can be input tax if, when the relevant goods or services are bought, there is an intention to put them to use in the business.

See VIT21000 for more on the link between purchases and supplies.