Input VAT: What's Recoverable, What Isn't

Recovering input VAT is one of the easiest places to leak tax cash. The FTA's blocked-input list is short but strict. Here is what you can claim, what you cannot, and the apportionment rules for partially exempt businesses.

The general rule

You can recover VAT paid on goods and services used to make taxable supplies, both standard-rated and zero-rated. You cannot recover VAT used for exempt supplies or non-business activities. If a purchase is used for both, you apportion based on use.

Practically: a software subscription used by your sales team is fully recoverable. The same subscription used by an exempt insurance arm is not recoverable. The same subscription split 70/30 across both is 70% recoverable.

The blocked list

Five categories are explicitly blocked regardless of business use: entertainment provided to non-employees (clients, suppliers, government); personal motor vehicles available for private use (with narrow exceptions for taxis, emergency vehicles, and vehicles in a fleet); employee benefits unless legally required; healthcare and accommodation for employees beyond legal mandates; and certain capital assets used for exempt activities.

The entertainment block is the most common surprise. A business lunch with a client is not recoverable. A staff team lunch is recoverable. A coffee with a candidate is not recoverable. The line is whether the recipient is an employee.

Apportionment for partial exemption

Businesses making both taxable and exempt supplies must apportion their input VAT. The default method is the standard ratio: taxable supplies divided by total supplies, applied to general overheads. Direct attribution applies first, purchases used wholly for taxable activity are 100% recoverable; wholly exempt is 0%.

If the standard method does not reflect economic reality (very common in property and finance), you can apply for a special method with the FTA. The application takes 60-90 days; in the meantime, use the standard method.

Practical record-keeping

Keep tax invoices for every input VAT claim, five years minimum. The invoice must contain your TRN, the supplier's TRN, the invoice number, the date, the description, the VAT amount, and the gross amount. Missing any element and the FTA will disallow on review.

For digital purchases (AWS, Google Workspace, etc.) the invoices are auto-issued but often missing the customer TRN. Update your supplier billing profile to include your TRN, without it, the receipts are just receipts, not tax invoices, and not recoverable.

This guide is general information, not professional advice. For situations that involve specific facts, talk to your accountant, or hire one of ours from the marketplace.