Input VAT is the VAT a VAT-registered business is charged on its own business purchases and expenses. You reclaim it by deducting it from the VAT you charge on your sales (your output VAT) on each VAT return, in Box 4. If your input VAT is more than your output VAT, HMRC repays the difference. You need a valid VAT invoice to support the claim, some costs are blocked (business entertainment and most cars), and the time limit for a claim is 4 years from the due date of the return on which you could first have claimed it.
What counts as input VAT
The legal definition is in section 24 of the VAT Act 1994: VAT on goods and services supplied to you and VAT paid on imports, where they are used or to be used for a business you carry on. HMRC's VAT guide (Notice 700) lists what this covers in practice:
- UK purchases. Goods and services supplied to you in the UK, including overheads and research and development costs;
- Imports. VAT on goods you import from outside the UK, including VAT you account for under postponed VAT accounting;
- Services from abroad. VAT on services supplied in the UK that you receive from overseas suppliers;
- Warehoused goods. VAT on goods you remove from a warehouse.
The key condition is business use. VAT on something bought for private use is not input VAT at all. Where a purchase is used partly for business and partly for something else, the law requires you to apportion it, and only the business share counts.
What you can reclaim and what you cannot
You can normally reclaim input VAT that relates to supplies you make at the standard, reduced or zero rate. A business whose sales are all zero-rated can therefore recover VAT on its costs even though it charges no VAT. Notice 700 lists the main things you cannot reclaim:
- Non-business costs. Goods and services not used for your business;
- Cars. VAT on a car, including fitted accessories and delivery charges, is generally blocked;
- Business entertainment. Hospitality given free to people who are not your employees, such as clients and suppliers. VAT on entertaining overseas customers may be recoverable if it is reasonable in scale and character, and entertainment for employees is not blocked;
- Exempt activities. VAT that relates to exempt supplies, such as insurance or most financial services, unless it falls within the partial exemption de minimis limits;
- Second-hand scheme purchases. Goods sold to you under a margin scheme, where no VAT is shown;
- Incorrect charges. VAT a supplier charged in error. Your remedy is to ask the supplier for a corrected invoice.
Evidence: the VAT invoice
To reclaim input VAT you must hold valid evidence of a taxable supply, which normally means a VAT invoice. A few points catch businesses out:
- Only a VAT-registered supplier can issue one. Knowingly using an invoice from an unregistered person to reclaim VAT is an offence;
- Pro-formas do not count. An invoice marked "pro-forma" or "this is not a tax invoice" cannot support a claim;
- Simplified invoices. A supplier can issue a less detailed invoice where the supply is £250 or less. If it does not show the VAT separately, you work out the VAT using the VAT fraction, which is one-sixth at 20%;
- Unpaid suppliers. If you have not paid a supplier within 6 months of the later of the date of supply and the due date for payment, you must repay the input VAT you reclaimed.
When to claim, and the 4-year limit
You should claim input VAT on the return for the period in which the supplier's tax point falls (for imports, the date of importation), provided you hold the evidence by then. If the invoice arrives later, you claim in the period in which you receive it. Under the Cash Accounting Scheme, you must also have paid for the supply.
If you miss a claim in the period you were first entitled to it, HMRC treats that as an error. The correction follows the error-correction rules rather than simply adding it to a later return, and the outside limit is 4 years from the due date of the first return in which you could have claimed. See our guide to VAT error correction.
VAT you paid before you registered
VAT on costs incurred before registration is not strictly input VAT. You can still treat it as if it were, provided the costs relate to your taxable business and you keep the required records:
- Goods. Supplied to you not more than 4 years before registration, and still on hand, or used to make goods you still hold. You need a stock account showing quantities and dates;
- Services. Supplied not more than 6 months before registration, and not related to goods you disposed of before registering.
Partly exempt businesses
If you make both taxable and exempt supplies, input VAT has to be attributed. VAT on costs used only for taxable supplies is recoverable in full. VAT on costs used only for exempt supplies is not. Shared overheads (residual input VAT) are split using a partial exemption method. Under Notice 706 you can still be treated as fully taxable if your exempt input VAT is not more than £625 per month on average and not more than half of your total input VAT for the period.
Worked example
Illustration only. A design agency on quarterly returns invoices £60,000 plus £12,000 VAT. In the same quarter it holds valid invoices showing £5,400 of VAT on its costs. That includes £300 VAT on a client hospitality evening and £900 on a new company car.
| Item | VAT |
|---|---|
| Output VAT on sales (Box 1) | £12,000 |
| VAT on all purchase invoices | £5,400 |
| Less: client entertainment (blocked) | (£300) |
| Less: car (blocked) | (£900) |
| Input VAT reclaimed (Box 4) | £4,200 |
| Net VAT payable | £7,800 |
If the agency had claimed all £5,400, it would have under-declared £1,200. HMRC can charge a penalty of up to 100% of tax under-stated or over-claimed on an inaccurate return, on top of the tax itself.
The legal basis is sections 24 to 26 of the VAT Act 1994. HMRC's guidance is in VAT guide (Notice 700), sections 10 and 11, Partial exemption (Notice 706) and Business entertainment (Notice 700/65). For the other side of the return, see our guides to output VAT and staff entertainment.
If you suspect past returns have under-claimed, our VAT recovery team can review what is still within the 4-year window. For mixed taxable and exempt activities, see our partial exemption service.