VIT13200 - VAT Input Tax basics: reasons for input tax restrictions

The input tax restrictions are in place to simplify the VAT system and prevent possible abuse.

Where goods are sold under a second hand scheme the restriction makes sure input tax is not claimed where any tax incurred is based on the supplier’s profit margin. In fact the amount of tax incurred will not normally be known.

Where goods and services are used for business entertainment the restriction is provided for under:

• Section 84(4)(c) of the Value Added Tax Act 1994; and

• The Value Added Tax (Input Tax) Order Statutory Instrument 1992/3222 - (article 5).The restriction on non-standard fixtures installed in buildings sold at zero rate, or subject to a long lease, is to prevent distortion of competition. Anyone installing any of the restricted items into their existing home would have to suffer the VAT on the cost of the goods. Restricting the right of builders to claim input tax prevents these goods being included as part of a zero rated supply of a new home.

  Similarly anyone selling a used home by way of business would be making an exempt supply. As a result they would only have limited input tax recovery on work carried out or goods installed in used homes.

  The UK applies a restriction on input tax recovery on cars bought for most classes of business use. This is instead of taxing the private use of business cars. Without the blocking order a business would have to calculate output tax due on private use by keeping detailed records of business and non-business mileage.

Further guidance on	Can be found in
Goods covered by the second hand scheme	Notice 718 The VAT margin scheme and global accounting
Business entertainment	VIT43200 and Notice 700/65 Business Entertainment
Goods installed in new dwellings	Notice 708 Buildings and construction
Cars	VIT50000 and Notice 700/64 Motoring expenses