This week I will cover some of the trickier aspects of claiming input tax when there is a potential or actual private use involved or when HMRC perceive it to be the case.
Private Use Input Tax
If an expense is for a non-business purpose, then the VAT relevant to this part is not classed as input tax and must be excluded from any claim. If however the expense is part private and part business, such as internet costs, whilst the legislation does not prescribe a specific method for apportionment of the cost, the method used to apportion the cost must be made on a fair and reasonable basis.
Input Tax: Benefit v Purpose
I am often asked by clients, can I claim for this or that and my experience is that many of them are somewhat over-optimistic about what expenses can relate to their business. A key word in the legislation is that an expense must be for the ‘purpose’ of the business in order for input tax to be claimed, which is very different to the question of whether an expense has a business ‘benefit’ – a benefit alone is not enough to justify an input tax claim.
To illustrate the point I’ll give you 2 examples:
1. Bob the builder
A builder client of mine, let’s call him Bob, is a member of his local Golf Club. Bob claimed input tax on his annual membership fee on the basis that he gets some of his work from fellow members that he meets either on the course or in the clubhouse bar. The primary purpose of the expense is clearly because Bob enjoys playing golf and any business he picks up is a secondary benefit. I therefore had to tell the disappointed Bob, that he couldn’t claim the input tax on his membership.
2. Pete the painter
A painter and decorator client of mine, we’ll call him Pete, was approached by the school that his 10 year-old son goes to and asked if he would sponsor the school football team, which his son plays in. Pete agrees as the school will allow him to have his business name and telephone number emblazoned on the team’s shirts.
In Pete’s case, whilst his generosity was almost certainly influenced by his son being in the team, nevertheless the primary purpose of the expense was to gain a clear business benefit for Pete and the input tax was therefore allowed.
Input Tax: Non-deductible items
The three most common claims that HMRC officers disallow relate to staff benefits, business entertainment and motor cars that are available for private use. Here are the basic rules:
Staff entertainment: Many firms will periodically take their staff out for a meal, a few drinks or perhaps a trip to the Blackpool Illuminations; usually as a thank you for a job well done. Unfortunately the benefit to the staff is considered to be for a non-business purpose and therefore not allowable.
Business entertainment: As a rule of thumb, this type of expense is normally non-deductible, however if the expenditure relates to a business meeting with overseas customers and the hospitality provided is ‘reasonable in scale and character’ then it’s allowable.
Private use of cars: The key test for this type of expenses is ‘availability’, which can be very different to the actual use. It is not good enough for a business owner to produce a mileage log confirming his vehicle has been used 100% for business trips since it was bought and has never been used for private journeys. If there is no physical restriction in place to prevent a private journey, eg an insurance policy that prevents private use, or a stipulation that the vehicle must garaged at the firm’s premises, then input tax cannot be claimed.
There is however, an exception for certain businesses. Input tax can be fully claimed on a car used as a tool of trade by a taxi business, a driving school or a car hire business, even where there is clearly some private use of the vehicle.
White Goods Input Tax
Builders and property developers cannot claim input tax on ‘white goods’ or moveable items they supply as part of either a new dwelling or a zero-rated building re-construction. White goods include: washing machines, fridges and dishwashers; moveable items include carpets and furniture but not wood flooring or kitchen units, which are fixed in the building.
If you would like more detailed information on some aspect of UK Tax, send me an e-mail and I’ll be pleased to advise further.