AAT L3 Chapter 4 - Input and Output Tax

What is required for the recovery of input tax by VAT-registered traders?

1. Evidence (VAT invoice)

2. No distinction between VAT on capital and revenue expenditure - both can be reclaimed

3. If asset is purchased which has both business and non-business use, only business use percentage can be recovered

What input VAT is irrecoverable/blocked?

1. Free/subsidised business entertaining/hospitality except proportion relating to

• Entertaining UK employees

• Entertaining overseas customers

2. Purchase of motor cars except

• If used 100% for business (e.g. taxi, driving school car, self-drive hire car, pool car)

• Commercial vehicle (e.g. vans, lorries)

3. If pay for rent/hire of car

• 50% of VAT is recoverable as long as there is some business use

Detail the rules for recovering VAT on different types of motor expenses.

1. Repairs

• All VAT is recoverable

2. Fuel if

• Fuel is used only for business

• Special rules if private fuel

Detail the rules for recovering VAT on private fuel.

1. If you want to recover all VAT on fuel

• Pay fuel scale charge and add net of VAT to outputs

• Add VAT on scale charge to output tax

2. If you want to recover VAT on business fuel only

• Keep detailed records of business and private mileage

• Only claim VAT on business mileage

3. If you do not want to claim VAT at all

• Do not claim VAT on fuel for any vehicle, including for vehicles that are only used for business, like commercial vehicles

What is the fuel scale charge and how is it applied?

1. Fixed charge applied for recovery of all input tax on private fuel

1. Set out in VAT Act 1994

2. Based on:

• CO2 emissions (g/km) - if not multiple of 5, must round to next multiple of 5 and use that scale charge

• Length of accounting period

3. Add scale charge net of VAT to outputs and add VAT on scale charge to output tax

What is output tax?

1. VAT charged on all taxable sales by VAT registered trader, including

• Taking goods for personal use - if owner of VAT registered business takes goods for private use, output tax applies

• Most sales of capital assets - unless asset is a car on which no input tax can be recovered

What is a partially exempt trader?

1. A business making taxable supplies can recover input tax incurred

2. A business making exempt supplies cannot recover input tax incurred

3. A partially exempt trader is one that makes both taxable and exempt supplies

• Input tax relating to taxable supplies can be recovered in full BUT

• Input tax relating to their exempt supplies can only be recovered if it is below a de minimis limit

Outline the types of recoverable and irrecoverable input tax for a partially exempt trader.

1. Recoverable

• Input tax on purchases used wholly to make taxable supplies

2. Irrecoverable

• Input tax on purchases used wholly to make exempt supplies

3. Residual (part recoverable and part irrecoverable)

• Split residual input tax into proportion recoverable and proportion irrecoverable

→ If total irrecoverable input tax < de minimis limit, then all input VAT can be recovered

What is the de minimis limit?

1. Average of £625 per month, below which irrecoverable input VAT can be recovered

• Must also not exceed 50% of total input tax