VAT Input Tax

VIT31200 - How to treat input tax: alternative evidence for claiming input tax

The right to deduct input tax

For a taxable person to exercise their basic right to deduct input tax, they must hold acceptable evidence such as a VAT invoice. The VAT invoice must comply with all the criteria set out in Regulation 14 of the Value Added Tax Regulations 1995 (SI 1995/2518).

Businesses who import goods for their business use and pay import VAT, would be required to hold a C79 certificate in order to recover the import VAT.

Considering alternative evidence

In the UK, under Regulation 29 of the Value Added Tax Regulations 1995, the Commissioners have discretion to allow claims that are not supported by the correct evidence. See VIT11500 and VIT31000.

Where claims to deduct VAT are not supported with a VAT invoice which complies with Regulation 14 or a C79 certificate in respect of imported goods, HMRC staff will consider whether or not there is satisfactory alternative evidence of the taxable supply available to support deduction.

HMRC staff will not simply refuse a claim without giving reasonable consideration to such evidence. HMRC has a duty to ensure that taxpayers pay no more tax than is properly due, nevertheless this obligation must be balanced against a duty to protect the public revenue.

Factors to consider by HMRC staff when exercising discretion

When considering the use of discretion, it is important to note that exercising the right to deduct input tax is subject to a legal requirement to hold a VAT invoice that meets the requirements of Regulation 14.

The VAT invoice is a legal requirement because it is:

• the evidence that VAT was due and charged by the supplier
• how HMRC fulfils its obligation of collecting the tax that is due

Therefore, in deducting VAT as input tax, there must be evidence that the VAT was charged by the supplier and the customer holds the VAT invoice showing the VAT charged. In exercising discretion to accept alternative evidence, HMRC must be satisfied that the alternative evidence shows that the VAT to be claimed was due and charged by the supplier and paid by the claimant. HMRC staff should be satisfied that the alternative evidence seen satisfies the requirements of Regulation 14.

Alternative evidence does need to contain the same details of a VAT invoice for deduction to be allowed. Under Reg 29 you are looking for satisfactory documents other than a VAT invoice as evidence  that the business is entitled to VAT deduction.

HMRC will not consider alternative evidence if a VAT invoice was not issued because:

• VAT was not due nor paid on the supplies
• the supplier did not charge VAT on their supplies

Where the taxpayer does not hold a VAT invoice, they must go back to the supplier and request one. If after repeated requests the supplier does not provide a VAT invoice, the supplier should be reminded of their legal obligation to issue a VAT invoice under Regulation 13. In circumstances where the taxpayer can demonstrate attempts made to obtain a VAT invoice  without success, HMRC may consider alternative evidence.

To recover import VAT in the absence of a C79 certificate, HMRC will consider any document that shows the claimant as the owner of the goods, evidence of import VAT charged, and any other evidence HMRC may require in order to allow deduction. 

Repeated failure to hold VAT invoices

The use of alternative evidence to support input tax claims is allowed only in exceptional circumstances. Under Regulation 29(2), a business must hold a VAT invoice as acceptable evidence for input tax deduction.

Where there is a repeated failure to support input tax claims with VAT invoices, HMRC will consider the circumstances surrounding each transaction on a case-by-case basis and decide whether exercising discretion can be justified.

For example, a business experiences the following at different times:

• the supplier refused to issue a VAT invoice and the business has taken reasonable steps to obtain a VAT invoice without success
• VAT invoice was lost/stolen or destroyed in a fire incident

HMRC will consider exercising discretion to accept alternative evidence based on the specific circumstances and if satisfied that there is no risk of fraud or threat to the revenue.

The taxpayer must be informed that the use of alternative evidence for input tax recovery is allowed in exceptional circumstances and does not replace the legal requirement to hold a VAT invoice that meets the requirement of Regulation 14.

Where a business presents alternative evidence to support input tax recovery as a routine, HMRC can refuse to exercise discretion to accept such evidence and therefore, disallow the input tax claimed.

Questions to ask

Example questions to determine whether there is a right to deduct in the absence of a VAT invoice.

• Do you have alternative documentary evidence other than an invoice (for example a supplier statement)?
• Do you have evidence of receipt of a taxable supply on which VAT has been charged?
• Do you have evidence of payment?
• Do you have evidence of how the goods/services have been consumed within your business or evidence about their onward supply?
• How did you know the supplier existed?
• How was your relationship with the supplier established? For example:
  • How was contact made?
  • Do you know where the supplier operates from (have you been there?)
  • How do you contact them?
  • How do you know they can supply the goods or services?
  • If goods, how do you know they are not stolen?
  • How do you return faulty supplies?

This list is not intended to be exhaustive. Further questions may be raised as necessary based on individual circumstances.

Deciding whether to allow discretion under Regulation 29

Where the taxpayer can provide satisfactory alternative evidence of the supply and there are no grounds to suspect abuse or fraudulent intent on the part of the claimant.

HMRC staff should normally exercise their discretion to allow the taxpayer to deduct the input tax.

Where a taxpayer fails to provide satisfactory alternative evidence of the taxable supply then it will not be authorised to deduct.

Whether discretion is exercised or not, HMRC staff should state clearly how they arrived at their decision.

What HMRC staff should do if they suspect fraudulent activity

Where there is evidence that the taxpayer received a taxable supply of goods associated with fraud and abuse, see VATF85000, and for the Kittel Principle see VATF50000, in the VAT Fraud manual.

Dissolved Companies

A commercial property, on which there is an option to tax, may be sold by a Fixed Charge Receiver (FCR) on behalf of a dissolved company. In that event, it is not possible for a legally VAT invoice to be issued evidencing the sale as the company whose property has been sold no longer legally exists. Therefore, in the above circumstance, a letter from the FCR to the purchaser of the property detailing the date of sale, the sale price and the VAT charged may be considered an acceptable form of alternative evidence in support of an input tax claim.