Input tax claims on costs relevant to sales that are outside the scope of VAT

Outside the scope with recovery. What does that phrase mean in relation to the nation’s favourite tax? I will fully explain its meaning in this article but that is not the main reason why I am banging away on my typewriter about this very important topic. The reason is because I have recently dealt with two HMRC enquiries about repayment VAT returns where the officers didn’t know what it meant either. They both jumped to the wrong conclusions and that is worrying. To paraphrase Oscar Wilde’s famous character Lady Bracknell: ‘To get it wrong once might be considered unfortunate to get it wrong twice shows a sign of carelessness.’

Case study

Software Sam is based in the UK and has only two customers – he supplies computer services to one business in Canada and another in France.

Sam’s services are outside the scope of UK VAT –...