VAT CASES - 13.01.2022

Did input tax relate to taxable supplies?

The case. ESD registered for VAT in August 2013, stating its activity was to renovate and develop properties. On an HMRC visit in 2016, the officer disallowed all input tax for periods January 2014 to October 2015, an amount of £324,065. During those periods, there had been no outputs declared on VAT returns or evidence of taxable supplies. The first output tax of £20,000 was declared on the January 2016 return, with another output for £373,579 shown on the July 2016 return but with no output tax.

The law. Input tax can only be claimed if it relates to taxable supplies made in the course or furtherance of a business. Any input tax claimed by a taxpayer must be supported by proper evidence, usually a tax invoice. HMRC has power under s.73 VAT Act 1994 to raise an assessment using “best judgement” if it thinks that input tax has been overclaimed or output tax understated.

The decision. HMRC showed the court that 70 purchase invoices on which input tax had been claimed related to a project called “Fitzwilliam” relevant to an associated business. The associated business was not VAT registered because it made exempt supplies. ESD felt that HMRC had acted unreasonably in issuing the assessment, but the judge disagreed. The appeal was dismissed.

Key points.This case highlights that the burden of proof is on a taxpayer to show that input tax has been correctly claimed on its returns. It also shows that if you have many different trading entities and associated companies, you must ensure that there are taxable outputs being made to support input tax claimed on your returns. If there are no taxable outputs for a VAT-registered business, there can’t be any input tax claims.