Value Added Tax

What is input tax?

Produced by Tolley
  • 19 Oct 2021 22:57

The following Value Added Tax guidance note Produced by Tolley provides comprehensive and up to date tax information covering:

  • What is input tax?
  • What is input tax?
  • What conditions must be met for VAT to be treated as input tax?
  • Has a supply been made?
  • Has the VAT been correctly charged?
  • Is the supply made to a taxable person?
  • VAT paid by a third party
  • Has the business received the goods / services for the purposes of their business activities?
  • Is there a direct and immediate link?
  • Are they a cost component?
  • More...

What is input tax?

This guidance note provides an overview of what conditions need to be met before a business is entitled to treat VAT incurred as input tax. This note should be read in conjunction with the other notes in the ‘Claiming input tax’ subtopic.

For a flowchart outlining the procedure for claiming input tax, see the Flowchart ― procedure for claiming input tax.

What is input tax?

The term ‘input tax’ includes the following:

  1. VAT incurred on goods and services that have been supplied to a taxable person

  2. for transactions prior to 1 January 2021, VAT incurred on the acquisition of goods from another EU member state (acquisition tax)

  3. VAT paid or payable on imported goods (import VAT)

VATA 1994, s 24(1); SI 1995/2518, reg 29(1)

The VAT must be used, or intended to be used, for the purposes of the business carried or intended to be carried on by the person receiving the supply.

VAT paid on the above only becomes ‘input tax’ if it meets the conditions outlined below.

What conditions must be met for VAT to be treated as input tax?

The following conditions must be satisfied before a VAT registered business can reclaim input tax:

  1. a supply must have been made

  2. the supplier must have correctly charged VAT on the goods / services supplied to the recipient reclaiming the VAT

  3. the supply must be made to a taxable person (ie a business that is VAT registered or required to be VAT registered)

  4. the business must receive the goods / services for the purposes of their business activities

  5. the recipient must be in receipt of a valid tax invoice or similar document

  6. the input tax should be recovered in the period covering the tax point. However, in practice, HMRC will normally allow a business to recover VAT on a later VAT return subject to the four-year cap

  7. the input tax must not be specifically disallowed or restricted by HMRC

These conditions are explained in more detail below.

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