VAT CASES - 30.11.2023

Was HMRC correct to disallow input tax on loss-making projects?

The case. Heartlands House Ltd (H) submitted a repayment return for £28,221 for its September 2019 period but HMRC disallowed most input tax on the basis that there was no link between the expenditure incurred and a taxable source of income. About 70% of the input tax disallowed by HMRC related to a supplier Caihma Construction Ltd (C), which was dissolved in September 2019, having never submitted either construction industry scheme or VAT returns to HMRC. The officer claimed that H had failed to provide evidence of making taxable supplies during this period.

The law. Input tax can only be claimed by a business if it relates to a taxable supply of goods or services made by a registered business; the onus is on the taxpayer to prove the link. The expense must be for the purpose of the business and proper evidence must be held to support the input tax claim, usually a tax invoice.

The decision. H provided details of four different projects where it received construction services from subcontractors, mainly C, and then recharged these costs, with a profit, to its customers. HMRC noted that some projects incurred losses because customers refused to pay due to allegedly defective work, and that only pro forma invoices were raised to one client, with no payments ever received. However, the judge disagreed with HMRC’s conclusion that there were no taxable supplies being made and attributed the situation to the poor management of H. The appeal was allowed.

Key points.This is a useful reminder that HMRC cannot insist on accounting and administrative perfection in a business as a condition of claiming input tax. There is no problem claiming input tax on loss-making or abortive projects if there is sufficient evidence to prove a link with taxable sales made by the business, as was the case here.