VAT you cannot reclaim

Categories of blocked input tax

The following categories of VAT are blocked from recovery under the Value Added Tax (Input Tax) Order 1992 and related legislation:

Business entertainment

VAT incurred on business entertainment is blocked from recovery. This applies even when the entertainment serves a genuine business purpose, such as building client relationships or winning contracts.

Business entertainment includes:

• Meals and drinks with clients, customers, or suppliers
• Hospitality at events (sporting events, theatre, concerts)
• Gifts to business contacts (except certain low-value gifts)
• Any form of hospitality provided to business contacts

The overseas customer exception

You can reclaim VAT on entertaining overseas customers (people not normally resident in the UK). This is the main exception to the business entertainment block.

To qualify:

• The person entertained must be your customer (not a supplier or general business contact)
• They must not be a UK resident
• Keep records showing who was entertained and their country of residence

Staff entertainment is different

VAT on staff entertainment (Christmas parties, team events, staff outings) is not blocked under the business entertainment rules. You can reclaim this VAT provided:

• The entertainment is open to all employees, not just directors or partners
• It relates to making taxable supplies

If entertainment is provided only for directors or partners of a business, the VAT is not input tax and cannot be reclaimed.

Motor cars

VAT on the purchase of motor cars is generally blocked. The law assumes that most cars have some private use, so the full VAT cannot be recovered.

Definition of a car: For VAT purposes, a car is a motor vehicle designed or adapted for carrying passengers, with up to 12 seats (including the driver's seat). This excludes:

• Vans and commercial vehicles (designed primarily for goods)
• Lorries and trucks
• Motorcycles
• Vehicles with more than 12 seats (minibuses and coaches)

When you CAN reclaim VAT on cars

VAT on car purchases is reclaimable only when the car is used 100% for business with no private use whatsoever. In practice, this applies to:

What counts as private use?

Any non-business use makes the full VAT on purchase unrecoverable. Common forms of private use include:

• Commuting between home and a permanent workplace
• Personal errands during business journeys
• Private use by employees or directors
• Taking the vehicle home (even if for security reasons)

Pool car rules: A genuine pool car must be kept at business premises, be available to multiple employees, and have no single employee allocated to it. If an employee takes the car home, it becomes a company car with private use, and the VAT block applies.

Leased cars - the 50% rule

For leased cars (not purchased), different rules apply. You can reclaim 50% of the VAT on lease rentals. This acknowledges that there will normally be some private use.

If you can show the car is used 100% for business (meeting the same strict tests as purchased cars), you can reclaim 100% of the lease VAT.

Non-business use

VAT is only reclaimable on purchases made for business purposes. VAT on personal or private purchases is not input tax.

Mixed use items

If you use something for both business and private purposes, you can only reclaim the business proportion of the VAT. Common examples:

• Mobile phone: If used 60% for business and 40% personally, reclaim 60% of the VAT
• Home office costs: Apportion based on business vs private use
• Equipment used at home: Calculate business percentage reasonably

Your apportionment method must be fair and reasonable. Keep records to support your calculation if HMRC enquires.

Items used for exempt supplies

If you make exempt supplies (supplies on which you cannot charge VAT), you cannot reclaim input tax on costs directly related to those supplies.

Common exempt activities include:

• Insurance
• Finance and credit
• Education and training (in some circumstances)
• Healthcare
• Betting and gambling
• Letting residential property
• Some property transactions

If your business makes both taxable and exempt supplies, you must use partial exemption rules to calculate how much VAT you can reclaim. This can be complex - see the separate guidance on partial exemption.

Purchases from non-registered suppliers

You can only reclaim VAT that has actually been charged by a VAT-registered supplier. If your supplier is not VAT-registered:

• They should not be charging VAT
• Any charge described as VAT is not actually VAT
• You have no input tax to reclaim

Check your suppliers: Before claiming input tax, verify that your supplier's VAT number is valid. You can check VAT numbers on the VIES (VAT Information Exchange System) or ask HMRC to verify a UK number.

If you pay an amount described as VAT to a non-registered supplier, you cannot reclaim it. You may need to pursue the supplier directly for a refund.

Missing or invalid invoices

You must hold a valid VAT invoice to reclaim input tax. HMRC can disallow any claim where you cannot produce proper evidence.

A VAT invoice must include:

• Supplier's name, address, and VAT registration number
• Unique invoice number and date
• Your name and address (for invoices over £250)
• Description of goods or services
• Total amount excluding VAT, the VAT amount, and total including VAT
• VAT rate applied

If an invoice is missing the supplier's VAT number, or any other mandatory information, you cannot reclaim the VAT until you obtain a corrected invoice.

Capital Goods Scheme adjustments

For high-value capital items, the VAT you reclaim may be adjusted over several years if the proportion of taxable use changes. This is the Capital Goods Scheme (CGS).

The CGS applies to:

• Land and buildings: Cost of £250,000 or more (excluding VAT) - 10-year adjustment period
• Computers: Cost of £50,000 or more (excluding VAT) - 5-year adjustment period
• Ships, boats, aircraft: Cost of £50,000 or more (excluding VAT) - 5-year adjustment period

If your use of the asset changes (for example, you start using it partly for exempt supplies), you must make an adjustment to the VAT originally claimed. This can result in:

• Payback: If taxable use decreases, you pay back some VAT to HMRC
• Additional recovery: If taxable use increases, you can reclaim more VAT

When partial recovery is possible

Some situations allow partial VAT recovery even when full recovery is blocked:

Leased cars

As noted above, you can reclaim 50% of VAT on lease payments for cars with mixed business/private use.

Mixed use items

Apportion VAT based on business use percentage for items used partly for business and partly personally.

Partial exemption de minimis

If your exempt input tax is both:

• Less than £625 per month on average, AND
• Less than 50% of your total input tax

You can treat yourself as fully taxable and reclaim all input tax.

Attributable vs residual input tax

Input tax that can be directly attributed to taxable supplies is fully reclaimable. Only input tax directly attributable to exempt supplies is blocked. Residual input tax (relating to both) is apportioned using your partial exemption method.

Common mistakes to avoid

HMRC frequently finds these errors during VAT inspections:

• Claiming entertainment VAT: Client lunches, hospitality events, and corporate entertaining are blocked - even if clearly business-related
• Claiming VAT on car purchases: Unless the car is genuinely 100% business use with no private element, the VAT is blocked
• Overlooking private use: Failing to apportion VAT on mixed-use items
• Claiming without valid invoices: Credit card statements and receipts without VAT numbers are not sufficient evidence
• Claiming from non-VAT-registered suppliers: Check VAT numbers are valid before claiming
• Ignoring partial exemption: If you make any exempt supplies, partial exemption rules apply

If you discover you have claimed VAT incorrectly, you should correct the error on a future VAT return or notify HMRC, depending on the size of the error.

Detailed input tax recovery rules

For comprehensive rules on input tax recovery, including pre-registration claims and the partial exemption calculation method: