The Importance of understanding who is supplying what to whom for VAT purposes

Written by yasiradnan94
23 January 2023

What is the issue?

Recent tribunal cases have further highlighted that a business can only claim input VAT if the expense was for business purpose and for supplies related to its own business. VAT can’t be claimed on an expense belonging to a different business even if they paid for the bill.

Implications for me?

HMRC can go back 4 years to correct previous errors and this can be costly. This means great care should be taken to ensure transactions are correctly dealt with from a VAT perspective at the outset. This is especially important where there may be more than 2 parties to a deal.

Where VAT is involved in deals involving 3 parties greater care needs to be taken as there is greater scope for invoices to be issued to the wrong business, i.e. the business that is paying an invoice rather than who the services or goods are actually being supplied to. Recent cases in court have highlighted how costly in can be if these issues are ignored and how difficult it is to rectify problems retrospectively.

Example of potential issues

Take the example of 3 parties to a transaction, the landlord (L), the trading company (TC) and the builder (B). The landlord is also the shareholder and director of the TC.

The landlord rents out commercial space to the TC and they in turn instruct a builder to carry out repair work to the premises. Complications will arise if the builder addresses invoices to the landlord rather than the TC and VAT is claimed by the TC. If HMRC investigated the VAT returns they would attempt to block the input VAT reclaim as the invoices were not addressed to the limited company.

Further issues often arise where a landlord issues the lease in the name of an individual rather than a limited company. In such a case the business using the premises can still reclaim VAT provided the below conditions are fulfilled;

  • Individual person is not VAT registered
  • The individual gives the rental invoices to the business and the payment to the landlord is made by the business, treating the payment as an expense in their accounts
  • The entire premises is used by the business

Conclusion

It is important to flag and review any three-party transactions to ensure correct treatment is applied for VAT. It can go a long way to ensuring an unwelcome HMRC enquiry doesn’t cost more in the long term.

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