Webb vs HMRC

A recent First-tier Tribunal decision serves as a timely reminder of the fundamental principle underpinning VAT recovery - you can only recover VAT on costs if it directly relates to a taxable supply.

In this case, HMRC assessed the appellant for over-recovered VAT.  The business had claimed VAT repayments on supplies which HMRC later determined were exempt from VAT, meaning no VAT was chargeable and therefore none could be recovered.  The business had previously operated a building services business, which involved taxable supplies allowing VAT recovery.  However, due to personal circumstances, it changed the business model without consideration of the impact to VAT recovery.  In the years that followed the business continued to recover VAT.

The business argued that he was unaware of the need to revise his VAT recovery model.  It relied on a past interaction with the Inland Revenue in 2005, which did not address VAT issues, and assumed the business practices remained compliant. The Tribunal found this thought process to be misplaced and concluded that the VAT recovery was not valid under current VAT rules.

This case highlights a common issue we encounter, particularly among not-for-profit organisations.  Many seek VAT registration hoping to recover VAT on costs, but often they either:

• Make no VAT-liable supplies, or

• Make minimal taxable supplies, rendering VAT recovery negligible.

Before registering for VAT, it is essential to assess whether your organisation makes taxable supplies and whether the potential recovery justifies the administrative burden of registration.