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HMRC internal manual

VAT Input Tax

VAT Input Tax basics: reasons for input tax restrictions

The input tax restrictions are in place to simplify the VAT system and prevent possible abuse.

Where goods are sold under a second hand scheme the restriction makes sure input tax is not claimed where any tax incurred is based on the supplier’s profit margin. In fact the amount of tax incurred will not normally be known.

Where goods and services are used for business entertainment the restriction is provided for under the ‘stand still’ provisions of Article 17.6 of the EC 6th Directive - see VIT43200.

The restriction on non-standard fixtures installed in buildings sold at zero rate, or subject to a long lease, is to prevent distortion of competition. Anyone installing any of the restricted items into their existing home would have to suffer the VAT on the cost of the goods. Restricting the right of builders to claim input tax prevents these goods being included as part of a zero rated supply of a new home.

Similarly anyone selling a used home by way of business would be making an exempt supply. As a result they would only have limited input tax recovery on work carried out or goods installed in used homes.

Some EC States allow input tax to be claimed on cars purchased for business purposes. However, Article 17.6 allows Member States to keep whatever restrictions were already in place under national legislation prior to the implementation of the 6th Directive. Member States can amend their laws to conform more closely with the Directive but they cannot add to the existing restrictions.

The UK applies a restriction on input tax recovery on cars bought for most classes of business use. This is instead of taxing the private use of business cars. Without the blocking order a business would have to calculate output tax due on private use by keeping detailed records of business and non-business mileage.

Further guidance on Can be found in
Goods covered by the second hand scheme Notice 718
The VAT margin scheme and global accounting     
  Business entertainment VIT43200
Notice 700/65 Business Entertainment     
  Goods installed in new dwellings Notice 708 Buildings and construction 
  Cars VIT50000
Notice 700/64 Motoring expenses