What can you learn from HMRC’s input tax toolkit?

Robust checking

When you submit your quarterly returns, it is important that you apply robust checks to ensure the figures are correct. This will avoid potential penalties if errors are made which come to light and are deemed to be careless. HMRC’s published VAT Input Tax Toolkit is divided into three sections, all of which could be useful to your business:

• risk areas with input tax claims
• a checklist to ensure that you are claiming input tax correctly
• an explanation about how to reduce the risk of errors.

Tip. Use of the toolkit is, according to HMRC, “entirely voluntary”. Some topics might not be relevant to your trading structure. It was last updated in June 2022, so will not include recent changes to the legislation, e.g. an increase in the capital goods scheme threshold for land and property projects from £250,000 to £600,000 excluding VAT from 29 July 2026 and the withdrawal of computer expenditure from the scheme on the same date.

Checklist

The checklist section of the toolkit places a high emphasis on ensuring you have “satisfactory evidence” to support an input tax claim, which is a tax invoice in most cases. There is also a question about tax points, i.e. ensuring you claim input tax in the correct period. For example, you cannot claim input tax until you pay a supplier if you use the cash accounting scheme. The toolkit notes that overclaims are common on vehicle expenses. There is a 50% input tax restriction on the cost of leasing or renting cars if there is any private or non-business use. You cannot claim input tax on the purchase of a car if it is intended that it will be made available for private use, which is virtually all cars unless they are a tool of trade, such as vehicles for taxi drivers, car hire businesses and driving schools.

Input tax must be adjusted on road fuel expenses where there is some private use, perhaps using the scale charge system which depends on the CO₂ emissions of the car. The checklist explains that you can claim input tax on mileage payments paid to employees for business trips if they produce tax invoices as evidence of their fuel purchases.

Risk areas

The section headed “Explanation and mitigation of risks” gives 17 separate tips about avoiding input tax errors. Common issues to consider include the following:

1. Check your accounting records for posting errors, e.g. duplicated claims, arithmetical errors, VAT and net values transposed, claims on expenses that are supplied to third parties and not your business.
2. The importance of carrying out partial exemption calculations, including the annual adjustment at the end of each tax year.
3. Adjusting input tax claims for any private or non-business use.
4. Accounting for the reverse charge on services purchased from abroad, if the service is taxable under UK law, e.g. software expenses, management consultancy fees, etc.

It is a common error to not adjust the Box 4 input tax figure with the reverse charge to recognise any private or non-business expenditure. Partial exemption must also be considered.