Input tax/partial exemption in a nutshell
Input tax is the VAT which a VAT-registered business incurs on purchases (stock, overheads, capital assets) and which it uses for business purposes. If the business makes only taxable supplies, it can recover all its input tax (with certain exceptions).
If the business makes only exempt supplies, it cannot recover any of its input tax (and usually will not be VAT registered); if it makes both taxable and exempt supplies, it is partly exempt and can only recover the input tax attributable to taxable
What are taxable supplies?
Taxable supplies are any supplies (generally speaking, sales) made in the course of a business which are not exempt supplies. Supplies at the standard, reduced and zero rates are all taxable supplies.
What are exempt supplies?
The main categories of exempt supplies are:
- Betting and gaming
- Health and welfare
- Financial services
- Certain supplies of, or in relation to, land
How and when do I recover input tax?
Input tax is recovered in the VAT accounting period in which it is incurred. It should be included in the input tax box on the VAT return for that period. It will offset the amount of output tax (VAT due on sales). If the amount of input tax exceeds the
amount of output tax, this will generate a refund from HMRC.
What are the exceptions to input tax recovery?
Broadly (and in addition to input tax which is attributable to exempt supplies):
- VAT on the purchase of a motor car which is not intended wholly for business use
- 50% of the VAT on the lease of a motor car which is not intended wholly for business use
- Entertainment (except in relation to overseas customers)
- Certain goods incorporated in buildings where the sale of the building will be zero-rated
Can I recover input tax if I am not VAT registered?
Generally, no. But if you register for VAT, the VAT on services obtained up to 6 months before the date of registration is recoverable, as is the VAT on goods obtained within four years of the VAT registration date (provided they are still on hand at
the time of registration).
If I’m partly exempt, how do I work out how much input tax I can recover?
The input tax should be divided into three categories:
- Input tax directly attributable to taxable supplies
- Input tax directly attributable to exempt supplies
- Input attributable to both exempt and taxable supplies, or directly attributable to neither (ie general overheads)
Input tax falling with a) is recoverable.
Input tax falling within b) is not recoverable
Input tax falling within c) is recoverable according to the proportion which the value of taxable supplies bears to the aggregate value of taxable and exempt supplies. Thus if taxable supplies amount to £100,000 and exempt supplies amount
to £50000, the proportion of c) which is recoverable is 67% (100000/150000).
This exercise is carried out for each VAT return period. To allow for fluctuations, an annual adjustment is required.
Are there alternative ways of working out my input tax recovery?
Yes; if the above method (the standard method) does not give a fair and reasonable recovery rate, it is possible to use any method which does achieve such a result.
What if my exempt supplies are minimal?
If the amount of input tax attributable to exempt supplies is below certain ‘de minimis’ limits, it may be recovered in full.
Are there any anti-avoidance rules?
Yes, there are measures to prevent the manipulation of the attribution rules.