Insufficient link between expenses and business

The taxpayer registered for VAT in April 2019 and submitted a series of repayment returns for periods October 2019 to January 2021. With the exception of the first return HMRC blocked the net repayments so input tax disallowed by HMRC was adjusted on each separate return. For the October 2019 period a ‘best judgment’ assessment was issued by the officer for £2 639.75 (VATA 1994 s73(1)).

HMRC disallowed the input tax because many expenses did not appear to be directly related to taxable sales and were either non-business or privately linked to the director rather than the company. It issued an information notice (FA 2008 Sch 36) in August 2020 to acquire more information about the nature of the claims and how they were linked to the company’s business activities.

There were many reasons why HMRC disallowed input tax. For example there was a...