VAT - 17.04.2018

Can HMRC refuse a VAT claim for non-vital expenses?

What’s the reason?

Generally, the rules for reclaiming the VAT on expenses are more relaxed than for direct tax, e.g. corporation tax, deductions. However, that doesn’t mean to say that VAT can be reclaimed for every expense. There must be a clear business motive at the time the expense is incurred. If there’s also a private purpose, the amount of VAT you can reclaim must be “fair and reasonable”, i.e. proportionate to the business use.

Trap. It’s not enough for a purchase to benefit your business, the reason for the expenditure must obviously be for the business and have an immediate business purpose.

Example. A director of Acom Ltd pays for membership of a private club. He’s made many business contacts through the club and this has brought in a lot of work for Acom. While HMRC may accept that in hindsight there’s a business advantage to the membership, when it was paid it was not definite that there would be one. It would say that the purpose of the expense is personal and that the business benefit was an advantageous side effect.

What’s the true purpose?

HMRC inspectors are notorious for refusing VAT claims for expenses that don’t have a clear and obvious business motive. For example, landscaping the outside area to a firm’s premises. However, HMRC doesn’t have the power to refuse a VAT claim just because an expense isn’t necessary for your business. As long as the motive for carrying out the work is, in your mind, for the business, you can recover the VAT on the full expense.

What does the law say?

VAT legislation isn’t very helpful in determining whether or not VAT can be reclaimed. But there have been some decisions made by the courts. These look at what was in the buyer’s mind at the time of purchase. The decisions provide ammunition if you get into a fight with HMRC.

Tip 1. In the event of a challenge from HMRC about the motives of an expense, you can direct it to one of several UK and EU court decisions which support the right to reclaim VAT for expenses incurred to indirectly promote your business. For example, creating a favourable impression or environment to attract existing or potential customers to your business (see The next step ).

Tip 2. If you intend to spend money that doesn’t have an obvious business purpose, keep records, e.g. board or partners’ meetings, reflecting the business motives behind the decision. Should HMRC question why you reclaimed the VAT, show it the notes from the meetings.

Trap. Special rules for reclaiming VAT apply to some types of capital asset, most commonly land and buildings (see The next step ).

Full or partial claims. If at the time you incur an expense you believe it will be used wholly for business purposes, and so reclaim all the VAT, but later there’s private use, you do not have to repay any of the VAT reclaimed. The reverse is also true, and so it’s important that you consider future use of major expenses carefully at the time of purchase.

For a list of court rulings and for more information on the special rules, visit http://tipsandadvice-business.co.uk/download (CD 19.14.07).