VAT CASES - 03.11.2021

Was input tax claimed by wrong business?

The case. Mr and Mrs T were partners in a business that intended to convert two flats into bed and breakfast accommodation. They were also equal directors and shareholders in Blaenau Bach Farm (BBF) which traded as a horse-riding business. The case related to input tax claimed by the partnership on two invoices issued and made out to the company - and paid by the company - for building works carried out on the flats. HMRC denied the claim and issued an assessment.

The law. Input tax can only be recovered on an expense if it relates to goods or services that are directly linked to taxable sales made by the business receiving the supply. The supply must also be made to that business and no other person or legal entity. There are further conditions, e.g. that the VAT has been charged correctly, and that the business maintains suitable records as evidence of entitlement to claim the input tax.

The decision. BBF appealed on the basis that the input tax related to the taxable activities of the partnership. HMRC decided that the supply of services had been made by the builders to the limited company, so only the company could claim input tax. The judge supported HMRC and the appeal was dismissed.

Key points.A twist to the tale here was that the limited company could not claim input tax on the invoices because it used the flat rate scheme. Users of the scheme can only claim input tax on capital expenditure goods costing at least £2,000 including VAT, such as a van or computer. It was therefore impossible for the company to claim input tax on the invoices from the builders and recharge the partnership for the services (plus VAT), which would have been an option if the company did not use the flat rate scheme.