Tax
News - Tax
9 June 2026
The Value Added Tax Act 1994 (VATA 1994 or “the Act”) mandates the charge of Value Added Tax (VAT) on the supply of goods or services in the United Kingdom (UK) as well as on the importation of goods into the UK. This means that businesses generally encounter VAT considerations at two key stages; when they are the supplier and when they are the recipient of supplies (whether from domestic or overseas suppliers). The VAT at these key stages are referred to as output tax and input tax, respectively.
Section 24 of the VATA 1994 distinguishes between input and output tax and defines the former as the VAT on goods or services supplied to a taxable person as well as VAT payable on goods imported by a taxable person. However, this does not provide a blanket approval for businesses to claim as input tax, the VAT on all goods, services or imports supplied to them, especially since the Act specifies that the goods and services referenced must be those used for the business carried on or to be carried on by the taxable person (emphasis ours).
Accordingly, given the wide range of expenses incurred by businesses, including direct, indirect, mixed-use, and even unusual expenses such as hiring influencers for brand promotion, the question of what business expenses qualify for input tax purposes becomes crucial.
Direct expenses are business costs that can be directly attributed to a business’s core trading activities. They typically represent specific costs incurred in the production or provision of goods or services, without which such goods or services could not be produced or provided. Examples of these expenses include, but are not limited to, production cost, staff wages, cost of goods to be sold, importation and freight costs, utilities, and product insurance.
For this category of expenses, it is generally straightforward to establish that the goods or services acquired are used for the purposes of the business carried on, or to be carried on. Accordingly, input tax considerations are often relatively clear in respect of such expenditure, since the business purpose criterion can be easily proven. However, it is important to note that any input VAT claim must be supported by appropriate evidence that the business has been charged VAT on the relevant expense.
Additionally, it is necessary to also determine whether the expenses under consideration relate to taxable supplies, exempt supplies or whether they are outside the scope of VAT entirely. For instance, expenses such as insurance are generally exempt from VAT under Schedule 9 of the VATA 1994. Staff wages on the other hand do not constitute a supply of goods or services and so do not fall within the scope of transactions on which VAT should be charged. Given that no VAT charge arises in either case, input tax recovery will not apply.
Unlike direct expenses, these are business costs that cannot be directly attributed to a business’s core trading activities. They are overhead costs such as rent, cleaning, consultancy fees, internet, and phone bills amongst others. Input tax recovery for these types of expenses can be subjective, as a clear business purpose must be established. For example, consideration must be given to whether the cost of a software subscription has a sufficient business purpose to justify input tax recovery, particularly where such software is more commonly associated with personal use.
Similarly, certain advertising costs, for instance the cost of hiring a social media influencer or celebrity to attend company events and interact with customers and persons who are not employees must be assessed to determine whether they constitute advertising expenditure or business entertainment and thus blocked from input tax recovery by virtue of the VAT (Input Tax) Order 1992. This is the principle that was applied in the British Car Auctions Ltd Value Added Tax Tribunal Decision 522 where input VAT claim on racehorses purchased was denied because the Tribunal determined that the horses were acquired primarily for business entertainment.
Employee entertainment expenses also require careful evaluation. Although input VAT on employee entertainment may generally be recoverable, factors such as the whether the costs have been incurred by the employee to entertain a non-employee, the status of the individuals involved (for example, where only directors are entertained) can affect recovery and, in some cases, result in a blocked or restricted input tax claim.
Expenses may be incurred partly for business purposes and partly for private purposes. In addition, some businesses make both taxable and exempt supplies. Both instances can give rise to restrictions on input tax recovery as they involve expenses incurred for mixed purposes. Examples of such expenses include internet expenses where this is used for business and personal purposes, cars purchased for business and personal use, expenses by businesses that trade in both taxable and exempt goods and/or services. Where this is the case, input tax recovery will be subject to the partial exemption rules (where the expenses relate to taxable and exempt supplies) or a fair and reasonable apportionment (for expenses that relate to business and private purposes).
Alternatively, where expenses are incurred to purchase assets (other than immovable property, ships, boats, other vessels and aircraft) that are used or to be used for business and private purposes, businesses may elect to recover the full amount of input tax immediately under the Lennartz accounting mechanism and self-account for the VAT on the private use of such assets over its economic life. It is also possible to treat the private use of business expenses as entirely outside the business and so input tax is not recovered on this portion of the expense. Additionally, there are guidelines published by His Majesty’s Revenue and Customs (HMRC) on the recoverability of input tax on select motoring expenses where mixed use is involved.
Businesses must consider the purpose of the expenditure, the nature of the supply, any private or non-business use amongst other factors in assessing whether the VAT incurred on an expense can be recovered or not. Failure to do so can result in incorrect VAT claims and potential HMRC assessments. Remember even where an expense qualifies for input tax recovery, VAT cannot generally be reclaimed without the appropriate supporting documentation.
Determining whether VAT is recoverable is often more complex than simply identifying whether an expense was incurred by the business. Please contact us today on 0151 709 9999 or email info@amyerson.com for more information on how we can support you in ensuring that your input tax claims are accurate in accordance with the law.
