Input VAT recovery, that’s your RIGHT

A fundamental pillar of VAT is that input transactions must be incurred in the furtherance of the taxable person’s business. Without this, VAT ceases to be value added, it becomes a tax effecting the cost of your business and related supplies.

Except for exempt or partially exempt businesses there are a very limited number of cost types blocked for input VAT recovery, these include:

  • Domestic accommodation

  • Personal interests like sport or leisure

  • Owners personal costs

  • Non-business costs (the rationale as to entertainment and cars being blocked)

There are some sectors where there are limited recoveries (like tour operators, where to simplify the cross-border VAT rules, the operator cannot claim VAT on customer travel). In these limited circumstances, if there is a block on your VAT deduction, then you will be relieved of some, or all the VAT when you make an onward sale. Consequently, there is no VAT on the sale of your company car, because this would constitute double taxation. Integral parts of the VAT system are; non avoidance, non-evasion and double taxation.

In all other circumstances, the integrity of the VAT system means HMRC need a legal reason to deny input tax deduction. Evidence is required to support the right to deduct, of which the prime piece is the invoice. Customers normally have direct control over supplies to them, however the invoice document is usually the last item to be produced, but with 20% VAT probably has the biggest potential saving.

The legislation (VAT General Regulation 13 & 14) states that suppliers are obliged to issue VAT invoices to their customers and also the requirements (see Note 1). However, for suppliers with many low value invoices who may struggle with complete requirements, e.g. perhaps they have a till system) there are simplified rules for transactions under £250 (Regulation 16). Simplified invoices have the following requirements:

  • name, address and VAT ID of supplier

  • Date of supply

  • Description sufficient to identify the supplies

  • Total including VAT

Whether full or simplified invoices, ALL businesses are obliged to provide them, except for retailers which have to provide one if requested.

Importantly both full and simplified invoices do not have to contain the word “Invoice”. The document can be called; an application for payment, bill, folio, receipt or indeed nothing at all. As long as it contains all the details required by Regulations 14, 16 or 16A as appropriate, then it is still considered as a VAT Invoice.

So, what happens if you have an invoice (either full or simplified) missing some of the required details? It is often unfeasible to approach the supplier for a correct version. In these circumstances HMRC must consider whether to exercise discretion. Some items where they do not have to do this include where they have historically seen fraudulent activity, e.g. mobile phones, alcohol, oils and computer chips. However, where the supply is genuine, HMRC has a duty to consider alternative evidence. This duty is imposed on HMRC both by EU and domestic law.

The European Court of Justice Reisdorf v Finanzamt Köln-West (Case C-85/95) stated that Member States had “the power… to admit other evidence that the transaction in respect of which the deduction is claimed actually took place”. HMRC accepts this and the principle of alternative evidence. Regarding alternative evidence, the Statement of Practice says a taxpayer must be able to answer most of the following questions:

  • Is there alternative documentary evidence other than an invoice (e.g. supplier statement)?

  • Is there evidence of payment (a credit card statement)?

  • Is there evidence of how the costs were consumed within the business (such as a purchase order)?

  • How did the business know that the supplier existed?

  • How was the business introduced to the supplier?

In all of this it is worth remembering your rights under the Taxpayers’ Charter. In the very first paragraph HMRC tells you “We’ll presume that you’re telling us the truth, unless we have good reason to think otherwise.”

HMRC expects inspectors need to adopt the following approach when looking at alternative evidence:

  • Be satisfied that a genuine supply took place

  • The input tax is being claimed by the business to whom the supply was made

  • The correct VAT rate was applied to the supply

The business holds satisfactory evidence to the entitlement to input tax deduction, e.g. supplier correspondence, order details, delivery notes, statements of account, evidence VAT was paid, suppliers VAT registration.

HMRC’s internal guidance to inspectors makes it clear alternative evidence needs to be considered (irrelative of the degree to which is substantiates the transaction). Failure to consider the evidence would mean any case could fail if it went to court.

In our experience, HMRC does often act reasonably in these cases. There are several VAT Tribunal cases where HMRC has decided that there is insufficient evidence to support a VAT claim, and HMRC very often wins these cases. But many of these wins are cases where the transactions that were incurred are in markets prone to fraud. One case, North & South Groundwork Services Ltd [2015] TC 04408, which the taxpayer won, gives useful guidance. The case concerned a builder whose sub contractor’s invoices were incomplete. The builder was able to demonstrate to the Judges that he used the sub-contractor services to make onward supplies on which he charged VAT. The Judges criticised HMRC for failing to take into account the business’ needs for inputs to make outputs. HMRC should consider all the evidence, including internal evidence of why the business purchased the items and consumed the.

For example, a solicitor based in London representing a client in court in Glasgow has an overnight hotel bill that is incomplete. It can be proved the hotel is VAT registered with a Google search, and a credit card statement proves payment. In such a case HMRC must consider the solicitor’s invoice for court appearance to the client (and which might refer to the disbursement) and ask itself how the solicitor could have performed that service without spending a night in Scotland at a hotel.

Alternatively, a business sends a team of consultants to a client’s offices. The taxi bill for their journey from the station to the client offices might be incomplete, but HMRC must ask itself how else the team might have been made the journey.

Businesses will typically have Christmas events or other work-related functions for their employees. This, until very recently was a standard part of business life, particularly in some sectors. Therefore, HMRC should review these as normal business practices. Moreover, or especially if a business has and can demonstrate to HMRC that it has strong controls and procedures in place. These can include not paying suppliers unnecessarily or recklessly to also ensuring employees have to follow strict controls for expenses they incur and ensure they meet the rules and for the furtherance of the businesses objectives.

The environment of strict invoice rules and supplier till receipt technology may seem difficult for businesses. VAT is supposed to create a level playing field for business. So for businesses with strong controls, bona fide transactions and good documentary or other evidence VAT should be neutral and indeed genuine transactions should not be denied input tax deduction.

At W2V we are analysing and recovering as many transactions as possible through the use of technology. Indeed our core technology, AIA can read limitless numbers of transactions and translate these in to VAT reclaim data. This system in particular looks at invoices for very low values where the likelihood of us receiving simplified invoices for retailers is high.

In these turbulent times, where cash is vital to a business survival, there are very often quick wins to be had in the area of travel and subsistence costs. These can be accessed for periods up to 4 years back. If you are interested in calculating or perform an historic recovery, please contact me.

Note 1

(a)a sequential number based on one or more series which uniquely identifies the document,

(b)the time of the supply,

(c)the date of the issue of the document,

(d)the name, address and registration number of the supplier,

(e)the name and address of the person to whom the goods or services are supplied,

(f)..omitted

(g)a description sufficient to identify the goods or services supplied,

(h)for each description, the quantity of the goods or the extent of the services, and the rate of VAT and the amount payable, excluding VAT, expressed in any currency,

(i)the gross total amount payable, excluding VAT, expressed in any currency,

(j)the rate of any cash discount offered,

(k)[omitted

(l)the total amount of VAT chargeable, expressed in sterling,

(m)the unit price,

(n)where a margin scheme is applied under section 50A or section 53 of the Act, the reference “margin scheme: works of art”, “margin scheme: antiques or collectors’ items”, “margin scheme: second-hand goods”, or “margin scheme: tour operators” as appropriate,

(o)where a VAT invoice relates in whole or part to a supply where the person supplied is liable to pay the tax, the reference “reverse charge”.

Note 2.

Many tax inspectors do not accept that the word “invoice” is not necessary for the VAT rules. The reason it is not necessary is that the English word “invoice” means a document sent to someone for supplies that have not been paid. If the customer has paid at or before the time they receive the document, then it isn’t an invoice. Words such as “bill” and “receipt” are therefore perfectly acceptable description of the document, and do not preclude it from being compliant with Regulation 14, 16 or 16A.