Tag Archives: VAT-input-tax

VAT: Changes to the Capital Goods Scheme

By Marcus Ward 13 July 2026

HMRC has produced a policy paper on the simplification of the Capital Goods Scheme (CGS).

The CGS is a mechanism for adjusting an input tax claim which requires a business to spread the initial input tax claimed over a number of years. If a business’ taxable use of the asset increases, it is permitted to reclaim more of the original VAT and if the proportion of the taxable supplies decreases it will be required to repay some of the input tax initially claimed. The use of the CGS is mandatory.

HMRC says its measure details the simplification of the CGS to reduce the administrative burden for VAT registered businesses.

From 29 July 2026:

computers and items of computer equipment will be removed from the list of assets covered by the scheme
the expenditure threshold for land, buildings and civil engineering work will increase from £250,000 (exclusive of VAT) to £600,000 (exclusive of VAT).

Existing assets and expenditure incurred before that date will continue to be treated under the current rules.

The Value Added Tax (Amendment) Regulations 2026 has been made to implement these changes.

The lifting of the CGS threshold for land and buildings is long overdue, but nevertheless welcome.

VAT on mobile phones – update

By Marcus Ward 3 July 2026

HMRC has updated Notice 700 to reflect the type of mobile ‘phone contracts and packages currently available and the VAT treatment of them. Details below, however, the salient issue with the update is that no input tax recovery is available if an employee has a contract in their own name (not the business itself).

VAT on the purchase or lease of a mobile phone

If a business provides its employees with mobile phones for business use, it can treat the VAT it incurs on purchasing or leasing a phone as input tax. This includes line rental charges where applicable, regardless of whether private use is allowed.

VAT on mobile phone call package and other charges

Business only

If a business incurs a recurring fixed monthly fee covering a package of calls, SMS and data, HMRC accepts that all the input tax incurred is recoverable.

If a business does not allow its employees to make private calls, all of the VAT incurred on call charges is input tax. HMRC accepts this where the business has clear rules prohibiting private use and enforces those rules.

HMRC accepts minimal private use as insignificant for VAT purposes and will not prevent the business from recovering all the VAT incurred on calls and mobile phone packages as input tax.

Charges for private calls

If a business charges employees for private use of their mobile phone it may treat the VAT incurred on that use as input tax but must account for output tax on the amounts charged.

If a business allows private use without charge, it must apportion the VAT incurred and recover only the part that relates to business use.

Method of apportionments

Businesses can choose any apportionment method that suits their circumstances, provided it produces a fair and reasonable result.

VAT on broadband connections

Where a business enters into a contract and pays for a fixed monthly charge for a broadband connection either mobile or cable to an employee’s home to enable them to work remotely, input tax can be recovered on the cost of providing the connection. This also applies to routers, installation charges and call bundles.

Some private use usually occurs, eg; entertainment packages or out of bundle charges etc. In such cases an apportionment should be made to restrict input tax recovery to only the business use of the service.

Mobile phone or broadband costs bought by the employee.

Where a business pays for a mobile, broadband or a package contract entered into by an employee with the service provider, no input tax is recoverable by the business. This is because the contract for the supply of services is between the provider and the employee, meaning the supply is made to the employee rather than to the business.

Business Entertainment VAT Notice 700/65 updated

By Marcus Ward 9 June 2026

HMRC Notice 700/65 has been updated. The ‘Business entertainment’ section has been amended to confirm persons who are, and are not, employees for the purpose of the recovery of input tax incurred on business entertainment.

A common day-to-day question is whether input tax incurred on entertainment is claimable. The answer to this seemingly straightforward question has become increasingly complex as a result of; HMRC policy, EU involvement, and case law.

I have looked at this subject in more depth here and this article also includes a helpful flowchart.

VAT – Care with input tax claims

By Marcus Ward 20 January 2026

Claim checklist

You have a purchase invoice showing VAT. You are VAT registered, and you will use the goods or services purchased for your business… can you claim it?

Assuming a business is not partly exempt or not subject to a restriction of recovery of input tax due to non-business activities (and the claim is not for a motor car or business entertainment) the answer is usually yes.

However, HMRC is now, more than ever before, concerned with irregular, dishonest and inaccurate claims. It is an unfortunate fact that some people see making fraudulent claims as an “easy” way to illegally obtain money and, as is often the case, honest taxpayers are affected as a result of the (understandable) concerns of the authorities. Missing Trader Intra-Community (MTIC) or “carousel” fraud has received a lot of publicity over recent years with an estimate of £Billions of Treasury money being obtained by fraudsters. While this has been generally addressed, HMRC consider that there is still significant leakage of VAT as a consequence of dishonest claims. HMRC’s interest also extends to “innocent errors” which result in input tax being overclaimed.

In order to avoid unwanted attention from HMRC, what should a business be watching for when claiming credit for input tax? Broadly, I would counsel making “reasonable enquiries”. This means making basic checks in order to demonstrate to HMRC that a business has taken care to ensure that a claim is appropriate. This is more important in some transactions than others and most regular and straightforward transactions will not be in issue. Here are some pointers that I feel are important to a business:

Was there a supply?

This seems an obvious question, but even if a business holds apparently authentic documentation; if no supply was made, no claim is possible. Perhaps different parts of a business deal with checking the receipt of goods or services and processing documents. Perhaps a business has been the subject of fraud by a supplier. Perhaps the supply was to an individual rather than to the business. Perhaps a transaction was aborted after the documentation was issued. There may be many reasons for a supply not being made, especially when a third party is involved. For example, Co A contracts with Co B to supply goods directly to Co C. Invoices are issued by Co B to Co A and by Co A to Co C. It may not be clear to Co A whether the goods have been delivered, or it may be difficult to check. A lot of fraud depends on “correct” paperwork existing without any goods or services changing hands.

Is the documentation correct?

The VAT regulations set out a long list of details that a VAT invoice must show. Full details on invoicing here If any one of these required items is missing HMRC will disallow a claim. Beware of “suspicious” looking documents including manually amended invoices, unconvincing quality, unexpected names or addresses of a supplier, lack of narrative, “copied” logos or “clip-art” additions etc. One of the details required is obviously the VAT number of the supplier. VAT numbers can be checked for validity here

Additionally, imports of goods require different documentation to support a claim and this is a more complex procedure (which extends to checking whether supplies of goods have been made and physical access to them). A lot of fraud includes a cross border element so extra care should be taken in checking the validity of both the import and the documentation.

Ultimately, it is easy to create a convincing invoice and HMRC is aware of this.

Timing

It is important to claim input tax in the correct period. Even if a claim is a day out it may be disallowed and penalties levied. details of time of supply here

Is there VAT on a supply?

If a supplier charges VAT when they shouldn’t, eg; if a supply is zero rated or exempt or subject to the Transfer of A Going Concern rules (TOGC), it is not possible to reclaim this VAT even if the recipient holds an apparently “valid” invoice. HMRC will disallow such a claim and will look to levy penalties and interest. When in doubt; challenge the supplier’s treatment.

Place of supply

Only UK VAT may be claimed on a UK return, so it is important to check whether UK VAT is actually applicable to a supply. The place of supply (POS) rules are notoriously complex, especially for services, if UK VAT is shown on an invoice incorrectly, and is claimed by the recipient, HMRC will disallow the claim and look to levy a penalty, so enquiries should be made if there is any uncertainty. VAT incurred overseas can, in most cases be recovered, but this is via a different mechanism to a UK VAT return. Details on claiming VAT in other EC Member States here. (As with many things, this may change after Brexit).

One-off, unusual or new transactions

This is the time when most care should be taken, especially if the transaction is of high value. Perhaps it is a new supplier, or perhaps it is a property transaction – if a purchase is out of the ordinary for a business it creates additional exposure to mis-claiming VAT.

To whom is the supply made?

It is only the recipient of goods or services who may make a claim; regardless of; who pays or who invoices are issued to. Care is required with groups of companies and multiple VAT registrations eg; an individual may be registered as a sole proprietor as well as a part of a partnership or director of a limited company, As an illustration, a common error is in a situation where a report is provided to a bank (for example for financing requirements) and the business pays the reporting third party. Although it may be argued that the business pays for the report, and obtains a business benefit from it, the supply is to the bank in contractual terms and the business cannot recover the VAT on the services, in fact, in these circumstances, nobody is able to recover the VAT. Other areas of uncertainty are; restructuring, refinancing or acquisitions, especially where significant professional costs are involved.

e-invoicing

There are additional rules for electronically issued invoices. Details here

A business may issue invoices electronically where the authenticity of the origin, integrity of invoice data, and legibility of invoice content can all be ensured, and the customer agrees to receive invoices electronically.

‘Authenticity of the origin’ means the assurance of the identity of the supplier or issuer of the invoice
‘Integrity of content’ means that the invoice content has not been altered
‘Legibility’ of an invoice means that the invoice can be easily read.

A business is free to choose a method of ensuring authenticity, integrity, and legibility which suits its method of operation. e-invoicing provides additional opportunities for fraudsters, so a business needs to ensure that its processes are bulletproof.

HMRC’s approach

If a claim is significant, or unusual for the business’ trading pattern, it is likely that HMRC will carry out a “pre-credibility” inspection where they check to see if the claim is valid before they release the money. Another regular check is for HMRC to establish whether the supplier has declared the relevant output tax on the other side of the transaction (a so-called “reference”). Not unsurprisingly, they are not keen on making a repayment if, for whatever reason, the supplier has not paid over the output tax.

What should a business do?

In summary, it is prudent for a business to “protect itself” and raise queries if there is any doubt at all over making a claim. It also needs a robust procedure for processing invoices. If enquiries have been made, ensure that these are properly documented for inspection by HMRC as this is evidence which may be used to mitigate any potential penalties, even if a claim is an honest mistake. A review of procedures often flushes out errors and can lead to increased claims being made.

As always, we are happy to assist.

VAT: Partial exemption input tax attribution. The Littlewoods case

By Marcus Ward 13 January 2026

Latest from the courts

In the Littlewoods Limited First-tier Tribunal (FTT) case the issue was the ability to recover input tax incurred on photography costs.

Background

Littlewoods used photographers for the creation of product specific photographs for use in catalogues and in connection with its online retail store. It made claims to recover this input tax, but HMRC refused a full refund. This appeal was against that decision.

The appellant is partly exempt. It makes taxable sales of goods and also makes exempt supplies of finance and insurance. This means that it is unable to recover all input tax it incurs.

Contentions

The appellant argued that the photography costs were directly attributable to the sale of the products photographed and was consequently fully recoverable.

HMRC contended that not all of the VAT was claimable because an element was referable to the exempt supplies (ie: the input tax was incurred to support both the online taxable sale of goods and of exempt finance). Therefore, an apportionment was required.

Decision

The appeal was allowed.

The Tribunal considered that each use made of the photographs to be exclusively in the making of taxable supplies of retail goods. Any link to credit or insurance was, in its view, at the most, indirect but, given the nature of the costs, probably non-existent. Consequently, the photography did not promote any finance or insurance products so that no restriction of the input tax claims was required.

Commentary

Yet another case on input tax attribution. As someone once said; partial exemption is more of an art than a science…

The judge distinguished this appeal from the N Brown case as the circumstances were different and that the court applied the wrong legal test in terms of the micro/macro level of business per the Royal Opera House case.

Charities and VAT – A Guide

By Marcus Ward 18 November 2025

Surely charities don’t have to pay taxes?

This is a common myth, and while charities and Not-For-Profit entities (NFPs) do enjoy some VAT reliefs, they are also liable for a number of VAT charges.

Charities have a very hard time of it in terms of VAT, since not only do they have to contend with complex legislation and accounting (which other businesses, no matter how large or complicated do not) but VAT represents a real and significant cost.

By their very nature, charities carry out “non-business” activities which means that VAT is not recoverable on the expenses of carrying out these activities. Additionally, many charities are involved in exempt supplies, eg; fundraising events, property letting, and certain welfare and educational services, which also means a restriction on the ability to recover VAT on attributable costs.

These two elements are distinct and require separate calculations which are often very convoluted. The result of this is that charities bear an unfair burden of VAT, especially so since the sector carries out important work in respect of; health and welfare, poverty, education and housing etc. Although there are some specific reliefs available to charities, these are very limited and do not, by any means, compensate for the overall VAT cost charities bear.

Another issue is legal uncertainty over what constitutes “business income” for charities, especially the VAT status of grants. It is worth bearing in mind here the helpful comment in the EC case of Tolsma translated as: “…the question is whether services carried on by [a person] were carried on for the payment or simply with the payment”.

Many charities depend on donations which, due to the economic climate have fallen in value at a time when there is a greater demand on charities from struggling individuals and organisations.

What can be done?

ensure any applicable reliefs are taken advantage of
if significant expenditure is planned, ensure that professional advice is sought to mitigate any tax loss
review the VAT position to ensure that the most appropriate partial exemption methods and non-business apportionment is in place
review any land and property transactions. These are high value and some reliefs are available. Additionally it is usually possible to carry out planning to improve the VAT position of a property owning charity
review VAT procedures to ensure that VAT is declared correctly. Penalties for even innocent errors have increased recently and are incredibly swingeing
consider a VAT “healthcheck” which often identifies problems and planning opportunities

We have considerable expertise in the NFP sector and would be pleased to discuss any areas of concern, or advise on ways of reducing the impact of VAT on a charity.

More detail on VAT and Charities for guidance

Business activities

It is important not to confuse the term ‘trading’ as frequently used by a charity to describe its non-charitable commercial fund-raising activities (usually carried out by a trading subsidiary) with ‘business’ as used for VAT purposes. Although trading activities will invariably be business activities, ‘business’ for VAT purposes can have a much wider application and include some or all of the charity’s primary or charitable activities.

Registration and basic principles

Any business (including a charity and NFP or its trading subsidiary) which makes taxable supplies in excess of the VAT registration threshold must register for VAT. Taxable supplies are business transactions that are liable to VAT at the standard rate, reduced rate or zero rate.

If a charity’s income from taxable supplies is below the VAT registration threshold it can voluntarily register for VAT but a charity that makes no taxable supplies (either because it has no business activities or because its supplies or income are exempt from VAT) cannot register.

Charging VAT

Where a VAT-registered charity makes supplies of goods and services in the course of its business activities, the VAT liability of those supplies is, in general, determined in the normal way as for any other business. Even if VAT-registered, a charity should not charge VAT on any non-business supplies or income.

Reclaiming VAT

This is usually a two stage process (a combined calculation is possible but it must have written approval from HMRC – Notice 706 para 7) . The first stage in determining the amount of VAT which a VAT-registered charity can reclaim is to eliminate all the VAT incurred that relates to its non-business activities. It cannot reclaim any VAT it is charged on purchases that directly relate to non-business activities. It will also not be able to reclaim a proportion of the VAT on its general expenses (eg; telephone, IT and electricity) that relate to those non-business activities.

Once this has been done, the remaining VAT relating to the charity’s business activities is input tax.

The second stage: It can reclaim all the input tax it has been charged on purchases which directly relate to standard-rated, reduced-rated or zero-rated goods or services it supplies.

It cannot reclaim any of the input tax it has been charged on purchases that relate directly to exempt supplies.

It also cannot claim a proportion of input tax on general expenses (after adjustment for non-business activities) that relates to exempt activities unless this amount, together with the input tax relating directly to exempt supplies, is below the minimis limit.

Business and non-business activities

An organisation such as a charity that is run on a non-profit-making basis may still be regarded as carrying on a business activity for VAT purposes. This is unaffected by the fact that the activity is performed for the benefit of the community. It is therefore important for a charity to determine whether any particular transactions are ‘business’ or ‘non-business’ activities. This applies both when considering registration (if there is no business activity a charity cannot be registered and therefore cannot recover any input tax) and after registration. If registered, a charity must account for VAT on taxable supplies it makes by way of business. Income from any non-business activities is not subject to VAT and affects the amount of VAT reclaimable as input tax.

‘Business’ has a wide meaning for VAT purposes based upon Directive 2006/112/EC (which uses the term ‘economic activity’ rather than ‘business’), UK VAT legislation and decisions by the Courts and VAT Tribunals. An activity may still be business if the amount charged does no more than cover the cost to the charity of making the supply or where the charge made is less than cost. If the charity makes no charge at all the activity is unlikely to be considered business.

An area of particular difficulty for charities when considering whether their activities are in the course of business is receipt of grant funding.

Partial Exemption

The VAT a business incurs on running costs is called input tax. For most businesses this is reclaimed on VAT returns from HMRC if it relates to standard rated or zero rated sales that that business makes. However, a business which makes exempt sales may not be in a position to recover all of the input tax which it incurred. A business in this position is called partly exempt. Generally, any input tax which directly relates to exempt supplies is irrecoverable. In addition, an element of that business’ general overheads are deemed to be in part attributable to exempt supplies and a calculation must be performed to establish the element which falls to be irrecoverable.

Input tax which falls within the overheads category must be apportioned according to a so called; partial exemption method. The “Standard Method” requires a comparison between the value of taxable and exempt supplies made by the business. The calculation is; the percentage of taxable supplies of all supplies multiplied by the input tax to be apportioned which gives the element of VAT input tax which may be recovered. Other partial exemption methods (so called Special Methods) are available by specific agreement with HMRC. There is also a de minimis relief.

My flowchart may be of use: partial exemption flowchart

Summary

One may see that this is a complex area for charities and not for profit entities to deal with. Certainly a review is almost always beneficial, as are discussions regarding partial exemption methods.

Please click here for more information on our services for charities.

VAT: Input tax incurred on the management of pension funds

By Marcus Ward 1 July 2025

HMRC has published Revenue and Customs Brief 4 (2025), which provides information about changes to VAT deduction on costs incurred in respect of the management of pension funds.

The Brief explains a further policy change to VAT deduction on the management of pension funds – Employers can now claim all the VAT on investment costs linked to pension funds. HMRC will no longer view investment costs as being subject to dual-use. Instead, all the associated input tax incurred will be seen as the employer’s and deductible by the employer, subject to normal deduction rule

They no longer need to split the costs with pension trustees. This was (prior to the introduction of the changes on 18 June 2025) a dual-use apportionment.

This Brief is relevant to:

businesses and other taxable entities that provide pension funds for their employees
pension administration and asset management service providers
pension fund trustees and pension providers
tax advisers

Impact on partial exemption methods

Businesses may need to propose new partial exemption special method (PESM) to align their VAT recovery with the new policy.

Background

HMRC’s historic policy was that employers could recover input tax they incurred on costs relating to the administration of their occupational pension funds, but not those in relation to the asset management of investments made by the fund.

Subsequently, HMRC changed its policy to allow employers recovery of input tax incurred on investment costs, provided that the employer could show evidence that they contracted and paid for the investment services.

HMRC has said that it will publish additional guidance on the new policy by Autumn 2025.

Commentary

This is very welcome news for managers of pension funds. It provides clarity and simplification in accounting, plus, more significantly; a much-improved VAT position whereby irrecoverable input tax can be avoided.

The HMRC climbdown is originally a result of the Fiscale Eenheid PPG Holdings BV cs te Hoogezand (C-26/12) CJEU case which considered an employer’s entitlement to deduct VAT paid on services relating to the administration of defined benefit pension funds and the management of the assets of the fund..

New VAT road fuel scale charges from 1 May 2025

By Marcus Ward 6 May 2025

HMRC has published new Road Fuel Scale Charges (RFSC) for the period 1 May 2025 to 30 April 2026.

RFSC

A scale charge is a way of accounting for output tax on road fuel bought by a business for cars which is then put to private use. If a business uses the scale charge, it can recover all the VAT charged on road fuel without having to identify specific business and private use. The charge is calculated on a flat rate basis according to the CO2 emissions of the car.

VAT: Input tax claims – alternative evidence

By Marcus Ward 12 February 2025

What can be used to make a claim?

It is well known that in order to claim input tax on expenditure a business is required to have a valid tax invoice to support it. But what if there is no VAT invoice? Can HMRC accept any other evidence to support a claim? Well, the answer is yes… sometimes.

HMRC has discretion provided by legislation: VAT Regulations 1995/2518 Reg 29(2). Specifically, the wording most relevant here is “…such other documentary evidence of the charge to VAT as the Commissioners may direct.” Broadly, a business must hold the correct evidence before being able to exercise the right to deduct.

Where claims to deduct VAT are not supported by a valid VAT invoice HMRC staff are required to consider whether there is satisfactory alternative evidence of the taxable supply available to support deduction. HMRC staff should not simply refuse a claim without giving reasonable consideration to such evidence. HMRC has a duty to ensure that taxpayers pay no more tax than is properly due. However, this obligation is balanced against a duty to protect the public revenue.

Full details of tax invoices here.

What HMRC consider

HMRC staff are required to work through the following checklist:

Does the business have alternative documentary evidence other than an invoice (for example a supplier statement)?
Does the business have evidence of receipt of a taxable supply on which VAT has been charged?
Does the business have evidence of payment?
Does the business have evidence of how the goods/services have been consumed or evidence regarding their onward supply?
How did the business know the supplier existed?
How was the business relationship with the supplier established? For example: How was contact made?
Does the business know where the supplier operates from (have staff visited?)
How did the business contact them?
How does the business know the supplier can supply the goods or services?
If goods, how does the business know they are not stolen?
How does the business return faulty supplies?

Outcome

If the responses to the above tests are credible, HMRC staff should exercise their discretion to allow the taxpayer to deduct the input tax. Overall, HMRC is required to be satisfied that sufficient evidence is held by the business which demonstrates that VAT has been paid on a taxable supply of goods or services received by that business and which were used by that business for its taxable activities

Challenge HMRC’s decision

A business may only challenge HMRC’s decision not to allow a claim (did not exercise its discretion) if it acted in an unfair or unreasonable way. In these cases, the onus is on the taxpayer to demonstrate that HMRC have been unreasonable in not using the available discretion. This is quite often a difficult thing to do.

Case law

Not surprisingly, there is significant case law on this subject. The most relevant and recent being the Upper Tribunal (UT) cases of James Boyce Scandico Ltdv and Wasteaway Shropshire Limited.

Tips

If possible, always obtain a proper tax invoice from a supplier, and don’t lose it! The level of evidence required when no invoice is held usually depends on the value of the claim. There would be a difference between persuading an inspector that £20 input tax on stationery is recoverable and the claiming of £200,000 VAT on a property purchase is permissible. As always in VAT, if you get it wrong and claim VAT without the appropriate evidence there is likely to be a penalty to pay.

If you, or your clients are in dispute with HMRC on input tax claims, please contact us.

VAT: Museums and galleries – updated guidance

By Marcus Ward 16 August 2024

The HMRC guidance for galleries and museums Notice 998 has been updated to reflect changes to the VAT (Refund of Tax to Museums and Galleries) (Amendment) Order 2024.

The Notice applies to those museums or galleries that offer free admission to the public and which are eligible for refunds of VAT under the museums and galleries VAT Refund Scheme. It can be used to find out which museums or galleries offering free admission are eligible for refunds under the scheme. The VAT Act 1994, section 33A, sets out how the scheme works, but generally:

Museums and galleries offering free access are not in business in relation to this activity (their supplies are “non-business“). They may, of course, have other activities that in their own right which are business activities, eg; catering, sales of books and gifts and exhibitions for which there is a charge.

Normally, it is not possible to recover the VAT incurred on goods and services purchased to support non-business activities. Thus, VAT incurred in connection with the free admission of the public is not normally recoverable and represents a cost to these organisations.

However, HMRC will reimburse this otherwise irrecoverable VAT. For this to be the case, the provisions of section 33A of the VAT Act 1994 must apply, and the museum or gallery must be named in an Order made by HM Treasury.