VIT11500 - VAT Input Tax basics: UK law

Definition of input tax
Entitlement to credit for input tax
Power to make Treasury orders
Supplies against which input tax is deductible
Content of an invoice
How and when input tax can be claimed
Evidence for deduction of input tax
Claiming input tax in a later period in case of error

The primary source of UK law dealing with the deduction of input tax is the VAT Act 1994:

Definition of input tax

Section 24(1)

Subject to the following provisions of this section, “input tax”, in relation to a taxable person, means the following tax, that is to say-

(a). VAT on the supply to him of any goods or services;

(b). VAT paid or payable by him on the importation of any goods, being (in each case) goods or services used or to be used for the purpose of any business carried on or to be carried on by him.

If VAT is incurred wholly or partly for other purposes then it can only be input tax to the extent that it is incurred for business purposes.

Entitlement to credit for input tax

Section 25(2)

Subject to the provisions of this section, he is entitled at the end of each prescribed accounting period to credit for so much of his input tax as is allowable under section 26, and then to deduct that amount from any output tax that is due from him.

Power to make Treasury orders

Section 25(7)

The Treasury may by order provide, in relation to such supplies, acquisitions and importations as the order may specify, that VAT charged on them is to be excluded from any credit under this section; and-

(a) any such provision may be framed by reference to the description of goods or services supplied or goods imported, the person by whom they are supplied or imported or to whom they are supplied, the purposes for which they are supplied or imported, or any circumstances whatsoever; and

(b) such an order may contain provision for consequential relief from output tax.

Supplies against which input tax is deductible

Section 26(2)

The supplies within this subsection are the following supplies made or to be made by the taxable person in the course or furtherance of his business-

(a) taxable supplies;

(b) supplies outside the United kingdom which would be taxable supplies if made in the United Kingdom;

(c) such other supplies outside the United Kingdom and such exempt supplies as the Treasury may by order specify for the purposes of this subsection.

Further secondary legislation relating to input tax is contained in statutory instruments. The following regulations in the VAT Regulations 1995 (SI 1995/2518) have relevance to the deduction of input tax:

Content of an invoice

Regulation 14(1)

Subject to paragraph (2) below and regulation 16 and save as the Commissioners may otherwise allow, a registered person providing a VAT invoice in accordance with regulation 13 shall state thereon the following particulars-

(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 and services are supplied;

(f) a description sufficient to identify the goods or services supplied;

(g) 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;

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

(i) the rate of any cash discount offered;

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

(k) the unit price;

(l) where a margin scheme is applied under section 50A or section 53 of the Act, a relevant reference or any indication that a margin scheme has been applied;

(m) where a VAT invoice relates in whole or part to a supply where the person supplied is liable to pay the tax, a relevant reference or any indication that the supply is one where the customer is liable to pay the tax.

How and when input tax can be claimed

Regulation 29(1)

Subject to paragraph (1A) below, and save as the Commissioners may otherwise allow or direct either generally or specially, a person claiming deduction of input tax under section 25(2) of the Act shall do so on a return made by him for the prescribed accounting period in which the VAT became chargeable save that, where he does not at that time hold the document or invoice required by paragraph (2) below, he shall make his claim on the return for the first prescribed accounting period in which he holds that document or invoice.

Evidence for deduction of input tax

Regulation 29(2)

At the time of claiming deduction of input tax in accordance with paragraph (1) above, a person shall, if the claim is in respect of-

(a) a supply from another taxable person, hold the document which is required to be provided under regulation 13;

(b) a supply under section 8(1) of the Act, hold the relative invoice from the supplier;

(c) an importation of goods, hold a document authenticated or issued by the proper officer, showing the claimant as importer, consignee or owner and showing the amount of VAT charged on the goods;

(d) goods which have been removed from warehouse, hold a document authenticated or issued by the proper officer showing the claimant’s particulars and the amount of VAT charged on the goods;

Claiming input tax in a later period in case of error

Regulation 34(1A)

Subject to paragraph (1B) and (1C) below, any overstatement or understatement in a return where-

(a) a period of 4 years has elapsed since the end of the prescribed accounting period for which the return was made; and

(b) the taxable person has not (in relation to that overstatement or understatement) corrected his VAT account in accordance with this regulation before the end of the prescribed accounting period during which that period of 4 years has elapsed,

shall be disregarded for the purposes of this regulation;

Regulation 35

Where a taxable person has made an error-

(a) in accounting for VAT, or

(b) in any return made by him,

then, unless he corrects that error in accordance with regulation 34, he shall correct it in such manner and within such time as the Commissioners may require.

VAT incurred on certain expenses incurred prior to registration and post-deregistration can be treated as if it were input tax

Regulation 111(1)

Subject to paragraphs (2) and (4) below, on a claim made in accordance with paragraph (3) below, the Commissioners may authorise a taxable person to treat as if it were input tax-

(a) VAT on the supply of goods or services to the taxable person before the date with effect from which he was, or was required to be, registered, or paid by him on the importation of goods before that time, for the purpose of a business which either was carried on or was to be carried on by him at the time of such supply or payment, and

(b) in the case of a body corporate, VAT on goods obtained for it before its incorporation, or on the supply of services before that time for its benefit or in connection with its incorporation, provided that the person to whom the supply was made or who paid VAT on the importation-

(i) became a member, officer or employee of the body and was reimbursed, or has received an undertaking to be reimbursed, by the body for the whole amount of the price paid for the goods and services,

(ii) was not at the time of the importation or supply a taxable person, and

(iii) imported or was supplied with the goods, or received the services, for the purpose of a business to be carried on by the body and has not used them for any purpose other than such a business.

Regulation 111(5)

Subject to paragraph (6) below, if a person who has been, but is no longer, a taxable person makes a claim in such manner and supported by such evidence as the Commissioners may require, they may pay to him the amount of any VAT on the supply of services to him after the date with effect from which he ceased to be, or to be required to be, registered and which was attributable to any taxable supply made by him in the course or furtherance of any business carried on by him when he was, or was required to be, registered.

Regulation 111(6)

Subject to paragraph (7) and (8) below, no claim under paragraph (5) above may be made more than 4 years after the date on which the supply of services was made.

Regulation 111(7)

Paragraph (6) above does not apply where -

(a) the person ceased to be, or ceased to be required to be, registered before 1st May 1997; and

(b) the supply was made before that date.

Regulation 111(8)

No claim may be made under paragraph (5) above in relation to a supply of services which was made on or before 31st March 2006.