Is it input tax: intention to make supplies
In this part of the manual any reference to taxable supplies made by the business includes other supplies which carry a right to deduct input tax. These are supplies which would be taxable if made in the UK and certain specified financial and insurance supplies.
Under normal input tax recovery rules VAT incurred can be recovered only if the input has a clear link to sales or the outputs of a business which carry a right to deduct input tax. In most cases this will be easy to work out because the business will be making, or will very soon be about to make, such supplies.
However, there may be circumstances where the supplies will not be made until a future date or a business fails before supplies have been made. When this happens the basic approach to input tax recovery is to treat the intended supplies the same way as actual supplies.
There are issues around evidence but the courts have consistently confirmed that preparatory works by a business in advance of taxable supplies are in themselves a business activity and as such the normal right to recover input tax must follow.
Some types of business will incur VAT on legitimate trading expenses before they make any supplies. For example in forestry VAT is incurred on the purchase of saplings, ground works and planting many years in advance of the intended supplies of timber. In these circumstances the VAT incurred is recoverable in the normal way.
The business should provide evidence of intended taxable supplies. There may be times where a business simply asserts that it is going to make supplies in the future and seeks to recover preparatory costs.
With the forestry example the intended business activity is clear. There may be other activities which are less obvious.
For example a business may seek to register and recover VAT on expenses on the basis that it intends to make management charges to an associated business. In this case the intended activity is less clear and the business should provide objective evidence of their intention. There is no exhaustive list of acceptable evidence and it will very much depend on the facts of the individual case. If there are any doubts recovery will not be allowed.
The case of Rompelman (see VIT62200) makes clear the requirement that the business should provide objective evidence of its intention to make future supplies.
Examples of the type of evidence that HMRC normally accepts as meeting the ‘in-business’ test are:
- Copies of invoices for expenditure you would expect a person either already in business or in the process of starting up a business to incur, for example accountancy or consultancy fees in relation to relevant business advice;
- Evidence of efforts to raise or secure finance for a business, for example letters to and from banks, finance institutions;
- Evidence of efforts to enter into contracts for either procurement of stock for resale or the for the supply of goods or services;
- A copy of a bid for a competitive tender - this should still be current;
- Details of actual or proposed advertising or marketing campaigns;
- Evidence of efforts to obtain planning permission for a business purpose - this should still be current and if the application has been refused alternative evidence may be required;
- Any other evidence demonstrating that a business is in place, or is being set up, such as letters from accountants, business plans, minutes of meetings.
There are additional considerations for businesses that have an intention to make supplies of land and property that have been opted to tax. These are discussed in section 22 of V1-8 Land and Property
Failed business - before supplies have been made
Unfortunately there will be times when business fail before they have actually made any supplies. The input tax recovery rules treat the intended supplies as if they were actual supplies. As long as there is a genuine intention to make supplies the VAT incurred on preparatory costs for the failed business will be recoverable subject to the normal rules.
The case of Ghent Coal (see VIT62200) is clear authority for this approach. If a business is:
- unable to fulfil its original intention to trade; and
- does not make a supply
there is no need for it to repay any input tax deducted in relation to the intended supplies.
However, output tax must be accounted for on:
- the cost value of goods; and
- the cost value of certain unconsumed services with an enduring value beyond the cessation of the business
which are on hand at the time of deregistration.
An example of an unconsumed service would be legal advice received in relation to intellectual property which has an enduring value.