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HMRC internal manual

VAT Small and Medium Enterprises Assurance Manual

HM Revenue & Customs
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Challenge of selected purchases and importations: checks on inputs - expenses

  • when significant input tax is attributed to purchases not supported by full VAT invoices, by less detailed tax invoices, or expenses incurred by employees on behalf of the business, the relevant records should be inspected to confirm that the cost of such inputs has been borne by the business;
  • where appropriate, a selective check should be made to confirm that employees have been reimbursed for their actual expenses and that they are, in fact, employees and not self-employed workers. See VAT Input Tax;
  • checks should always be conducted to ensure the input tax reclaimed relates to this registration. In transactions taking ownership of businesses, property or leases etc, the buyer often pays third party expenses; the VAT on these expenses (for example solicitors/estate agent fees) is not input tax of this trader;
  • where road fuel is supplied free, or below cost, or appropriated by sole proprietors for private use, scale charges apply Notice 700/64 Motoring Expenses and VAT Input Tax, explain these charges. Where “business only” motoring is claimed, evidence should be seen sufficient to satisfy the officer that this is so. Road fuel used in commercial vehicles for private use should be apportioned in the usual way. Input tax deductions in respect of road fuel, particularly petrol, are always open to abuse. If the trader is paying employees a mileage allowance the relevant records should be selectively scrutinised. The officer should also consider whether the rates of mileage allowance being paid form an acceptable basis for calculating the VAT, which is being deducted as input tax, Notice 700/64 Motoring Expenses Section 8 sets out the special rules that apply when an employer pays a mileage allowance to employees, and how input tax should be calculated;
  • in a similar way most vehicle leasing etc. is deemed to be 50% private expense and in those cases input tax should be reduced by that amount; and
  • where an officer finds that a trader has reclaimed VAT in respect of supplies obtained for the purpose of DIY house-building activities, the procedures laid down in VAT Construction Manual should be followed.