VAT Input Tax Appeals: When HMRC Refuses Your VAT Reclaim

You reclaimed VAT on your purchases, and HMRC has said no. Maybe a repayment you were expecting has been refused. Maybe an officer has gone back over old returns and raised an assessment clawing back input tax you deducted months or years ago. Or maybe the letter is more alarming still—it says your transactions were "connected with the fraudulent evasion of VAT," and that you knew or should have known.

Take a breath, and note the date on the letter. The letter itself will set out the amount in dispute and HMRC's reason for refusing it, and it should tell you that you can ask for a review or appeal to the tribunal, with the deadline for each. You have 30 days to appeal a VAT decision, and that deadline runs whether or not you agree with it. File the appeal first; sort out the detail afterwards.

One idea ties everything below together. Reclaiming input VAT is a right—but a conditional one. The VAT you paid is only recoverable if the purchase was for your taxable business and you hold the right evidence for it. Fail either limb and the claim fails.

There are two very different worlds inside an input-tax dispute. Your first job is to work out which letter you have.

HMRC Has Refused Your VAT Claim—What This Letter Means

There are two distinct ways an input-tax dispute reaches you, and they behave differently.

A refused repayment claim. You filed a VAT return showing more input tax than output tax, expecting a repayment (a "VAT credit"), and HMRC has refused or reduced it. Nothing has yet been taken from you—HMRC has simply declined to pay out. This is a decision about "the amount of any input tax which may be credited to a person."

A clawback assessment. You already deducted the input tax and HMRC paid or credited it. An officer has now decided the deduction was wrong and raised an assessment under section 73 of the VAT Act 1994 to recover the money. This is the route that turns a reclaim into a debt—and, as you will see, it can carry a pay-first rule.

Cutting across both is the reason HMRC gives. Most refusals are ordinary evidence or technical points: no valid VAT invoice, a blocked item like a car or client entertaining, input tax attributed to exempt activity, or a claim made too late. In that world the burden is on you to prove your entitlement.

The other world is a Kittel denial—HMRC alleging your transactions were connected to fraud somewhere in the supply chain, and that you knew or should have known. Here, unusually, the burden flips: HMRC must prove the knowledge. That is the heavy end, and it follows different rules, so it comes last.

How Reclaiming VAT Actually Works

If you are VAT-registered, the system is a running account. You charge output tax on what you sell and reclaim input tax on what you buy, and on each return you pay HMRC the difference—or, if your input tax is larger, you claim the balance back as a repayment.

The right to reclaim has three building blocks in the VAT Act. It is worth seeing them in plain English, because HMRC's case will usually attack one of them.

What counts as input tax. Section 24(1) VATA 1994 defines "input tax" as VAT on goods or services supplied to you (or imported by you) and "used or to be used for the purpose of any business carried on" by you. If the spending was not for your business at all—a private purchase, a hobby—it is not input tax in the first place.

The right to deduct. Section 25(2) VATA 1994 is the entitlement itself: at the end of each VAT period you are entitled to credit for input tax "allowable under section 26," and you deduct that from the output tax you owe. If the credit exceeds your output tax, the excess is paid to you as a VAT credit.

Attribution to taxable supplies. Section 26 VATA 1994 limits the credit to input tax attributable to your taxable supplies (and certain supplies outside the UK). This is the crucial filter. Input tax used to make taxable sales is recoverable; input tax used to make exempt sales generally is not. That distinction is where partial exemption bites, below.

Put the three together and the test is simple to state, even if it is hard to satisfy: the VAT must have been incurred on a supply to you, used for your taxable business, and evidenced in the way the rules require. HMRC sets out its own view of these principles in its VAT Input Tax Manual, which anchors much of what follows.

The Evidence Rules—Why "No Valid Invoice" Is The Commonest Refusal

The single most frequent input-tax dispute is not about whether the VAT was a business cost. It is about proof. You spent the money, the VAT was real—but you cannot produce a valid VAT invoice for it.

The starting point is that a VAT-registered supplier must give you a proper VAT invoice when it makes a taxable supply to you (regulation 13 of the VAT Regulations 1995). What makes an invoice "valid" is set out in regulation 14, which lists the particulars it must contain—among them a unique invoice number, the date and time of supply, the supplier's name, address and VAT registration number, the customer's name and address, a description of what was supplied, and the VAT rate and amount.

Two omissions cause most of the trouble: a missing supplier VAT number and a missing customer name. An invoice that lacks them is not, in law, a valid VAT invoice—and without one the right to deduct does not get off the ground. The Court of Appeal made the point bluntly in Tower Bridge GP Ltd v HMRC [2022] EWCA Civ 998: no valid invoice, no automatic right to deduct. Practitioners summarise it as "no ticket, no entry."

The Alternative-Evidence Safety Net

That is not always the end of the road. Regulation 29(2) requires you to hold a VAT invoice, but it contains a vital proviso: HMRC may direct that you hold or provide "such other documentary evidence of the charge to VAT" as it specifies. This is the alternative-evidence discretion—HMRC's power to accept other proof when a perfect invoice is missing.

HMRC's own published approach to this discretion is on the VIT31200 manual page and in VAT Notice 700. Broadly, HMRC will look at whether you hold alternative documentary evidence, whether there is evidence a taxable supply was actually received, whether you can show payment, how the goods or services were used or onward-supplied, and how you came to deal with that supplier. The list "is not intended to be exhaustive."

Here is the part that catches people out. Even where you think HMRC was wrong to refuse alternative evidence, the tribunal's role is supervisory only. It does not decide for itself whether your alternative evidence is good enough. It reviews whether HMRC's refusal was a decision that no reasonable body of Commissioners could have reached. If HMRC considered the right things and reached a tenable conclusion, the tribunal cannot simply substitute its own view.

What the tribunal can do is intervene where HMRC failed to exercise the discretion at all. In GB Housley Ltd v HMRC [2016] EWCA Civ 1299, HMRC raised an assessment without properly turning its mind to whether to accept alternative evidence, and that failure invalidated the assessment. The practical lesson the cases point to is to document everything—reasonable efforts to obtain the invoice from the supplier, proof the supply happened, proof of payment, and proof of how the purchase was used in the business.

The Time Caps

Input tax does not sit on the books forever. Under regulation 29(1A), HMRC must not allow a deduction claimed more than 4 years after the date the relevant return was due. Miss that window and the input tax is simply lost, however genuine it was.

There is a separate trap for newly registered businesses reclaiming VAT on things bought before registration. Under regulation 111, you can generally reclaim pre-registration VAT on goods you still hold up to 4 years before registration, but on services only up to 6 months before. VAT on pre-trading services older than six months cannot be recovered at all.

Input Tax You Can Never Reclaim—Blocked Items

Some input tax is blocked even though it was a genuine business cost. This surprises people, because the instinct is "it was a business expense, so I can reclaim the VAT." For two big categories, you cannot.

The block comes from the VAT (Input Tax) Order 1992, made under section 25(7) VATA.

Business entertainment. Article 5 excludes from credit the VAT on entertaining—hospitality of any kind provided in connection with the business. Entertaining clients, suppliers or contacts is blocked outright. (Entertaining your own staff is treated differently, but client entertaining is the classic disallowed claim.) HMRC's guidance is at VIT43200.

Motor cars. Article 7 blocks the VAT on buying a car. There is an exception for a car bought for use exclusively for business—but the catch is severe. You are not treated as intending exclusive business use if you intend to make the car available for private use, whether or not anyone is charged for it, and that expressly includes making it available to yourself.

Because a normal company car is, in practice, available to be driven privately, the VAT on it is almost always blocked—regardless of how little private use actually happens. (Cars genuinely used as taxis, self-drive hire or for driving instruction are the main exceptions.)

Partial Exemption, In Brief

If your business makes both taxable and exempt supplies, you are partly exempt and you can only recover the input tax attributable to the taxable side, plus a proportion of any "residual" input tax used for both. The standard method in regulation 101 apportions that residual input tax by the ratio of taxable turnover to total turnover.

There is a small mercy: under the de minimis rule in regulation 106, exempt-related input tax can be recovered in full if it averages no more than £625 a month and is no more than half of all your input tax for the period—both limbs must be met. Partial exemption is a large topic in its own right, and this is only a signpost; the detail is for a dedicated guide.

When HMRC Claws It Back—Assessments And Paying First

When HMRC decides you over-claimed input tax, it does not quietly edit your return. It raises an assessment to recover the amount.

The power is in section 73 VATA 1994. Section 73(1) lets HMRC assess the VAT due "to the best of their judgment" where returns are incomplete or incorrect. Section 73(2) is the specific input-tax clawback: where you have been paid or credited a VAT credit or repayment that "ought not to have been so paid or credited," HMRC can assess that amount as VAT due from you.

The "best judgment" standard that governs these assessments—and how to challenge it—is covered in detail in our guide to VAT penalties and appeals, so we will not repeat it here. The point for now is that a clawback usually arrives as a section 73 assessment, and that route carries a consequence the simple refusal does not.

The pay-first rule. For appeals against certain VAT decisions, including a section 73 assessment, the tribunal cannot "entertain" (hear) your appeal unless you have first paid or deposited the disputed VAT (section 84(3) VATA 1994). A pure input-tax decision—a refused repayment claim—is not subject to that rule, but a clawback assessment is.

There is a safety valve: hardship. Under section 84(3B), the appeal can proceed without payment if HMRC is satisfied (or, failing that, the tribunal decides) that paying would cause you hardship. Importantly, your appeal can still be validly made without payment—the deadline runs regardless—so file first, then deal with payment or hardship. Our guide to postponing payment during an appeal explains the hardship test and how to apply, and on top of any clawback, late-payment interest runs at 7.75% while the dispute continues.

The Serious One—Kittel And "Knew Or Should Have Known"

This is the heavy end, and it works unlike anything above. If a transaction in your supply chain is connected to VAT fraud—the classic pattern is missing-trader (MTIC) fraud, where a trader charges VAT, vanishes without paying it over, and the goods move on through a chain—HMRC can deny your right to deduct the input tax if you knew or should have known of that connection. A business that did nothing dishonest itself can still lose its recovery.

The principle comes from European case law that remains good law in the UK and is still applied by the courts and in HMRC's VAT Fraud manual. The starting point protects the honest trader: in Optigen Ltd, Fulcrum Electronics Ltd and Bond House Systems Ltd (Joined Cases C-354/03, C-355/03 and C-484/03), the Court held that an innocent trader's right to deduct is not affected by fraud elsewhere in the chain that it knew nothing about.

That was then qualified. In Kittel v Belgian State; Belgian State v Recolta Recycling (Joined Cases C-439/04 and C-440/04), the Court held that deduction may be refused where it is shown, on objective evidence, that the trader knew or should have known that by its purchase it was taking part in a transaction connected with fraudulent evasion of VAT.

Crucially for you, the burden of showing that sits with HMRC. In Mahagében Kft and Péter Dávid (Joined Cases C-80/11 and C-142/11), the Court held that the tax authority must prove, on objective factors, that the trader knew or should have known of the fraud—it cannot refuse deduction on mere suspicion, nor impose a general duty on traders to vet their suppliers. (The same "knew or should have known" idea runs across VAT generally: in Mecsek-Gabona Kft (Case C-273/11) it was applied on the supply side, to a vendor's zero-rating of an intra-Community supply, rather than to input tax—an illustration of the principle's reach, not an input-tax case itself.)

The leading UK authority is Mobilx Ltd (in administration) v HMRC [2010] EWCA Civ 517. The Court of Appeal held that the test catches not only the trader who actually knew, but one who "should have known that the only reasonable explanation for the transaction... was that it was connected with fraud." That is an objective test, and a demanding one for HMRC: it is not enough to show the trader should have known fraud was more likely than not.

The Court made a further point that matters to anyone who ran supplier checks. Focusing on due diligence can distract from the real question, which is whether the trader should have known of the connection to fraud. Doing due diligence is not a guaranteed shield—it is one piece of the picture the tribunal weighs, not a safe harbour. HMRC has codified this approach in its VAT Fraud manual.

The reach is wider than the immediate purchase. In Fonecomp Ltd v HMRC [2015] EWCA Civ 39, the Court of Appeal confirmed (applying Mobilx) that the connection to fraud need not be in the trader's own immediate chain—so-called contra-trading and indirect connections can be enough. And the bridge between the two worlds of this article is Tower Bridge GP Ltd v HMRC [2022] EWCA Civ 998, where the carbon-credit purchases failed on both counts at once: the invoices were invalid, and the trader should have known the transactions were connected to fraud.

A Kittel case is serious, document-heavy and fact-intensive. If your letter alleges a connection to fraud, this is the point at which professional representation is most valuable—the law here is technical and the stakes are high.

How To Appeal

The appeal route for VAT sits in the VAT Act, not the income-tax legislation, but it lands at the same place—the First-tier Tribunal (Tax Chamber).

The decision is appealable. Section 83(1) VATA 1994 lists the decisions you can appeal. A refusal or cap of input tax is appealable under section 83(1)(c) ("the amount of any input tax which may be credited to a person"); a clawback assessment under section 73 is appealable under section 83(1)(p). A Kittel denial is an input-tax decision under (c). The distinction matters for the pay-first rule discussed above.

The 30-day deadline. You must appeal before the end of 30 days beginning with the date on the document notifying the decision (section 83G(1) VATA 1994). Miss it and you will need the tribunal's permission for a late appeal, which is not guaranteed. There is no fee to appeal, and an appeal typically takes 6-12 months to reach a decision.

Use the free statutory review first. Before going to the tribunal you can take up HMRC's offer of a review by a different officer, completed within 45 days. This uses the VAT review framework in sections 83A to 83G—not the income-tax review route—and it is free, often quicker, and does not stop you appealing afterwards. Our guide to the HMRC internal review explains how it works.

Know where the burden lies—this is the key contrast. On an ordinary input-tax appeal (no valid invoice, blocked item, wrong attribution, out of time), the burden is on you to prove your entitlement to the credit. On the alternative-evidence point, remember the tribunal is supervisory only—it asks whether HMRC's refusal was reasonable, not whether it would have decided differently. But on a Kittel denial the burden is on HMRC to prove you knew or should have known of the connection to fraud. Identifying which burden applies tells you what your appeal actually has to establish.

What "it's unfair" cannot do. The First-tier Tribunal is a creature of statute. It applies the VAT legislation; it has no general power to overrule HMRC because an officer was unhelpful, slow or seemingly unfair. That limit is explained in our analysis of Hok v HMRC. Complaints about HMRC's conduct go down a different path—HMRC's complaints process, then the Adjudicator, and ultimately judicial review—not the tribunal.

Putting your grounds together. Match your grounds to the real issue. If the refusal is about a missing invoice, the grounds typically address whether you in fact hold valid invoices, and—if not—whether HMRC properly considered the alternative evidence you provided (or, as in GB Housley, failed to consider it at all). If it is a blocked-item or attribution point, the grounds engage the relevant provision directly. If it is a Kittel denial, the grounds focus on what HMRC must prove.

Our guide to writing grounds of appeal shows how to structure each, and how to appeal to the tax tribunal walks through the filing mechanics. If an inaccuracy penalty has been added on top of the disallowance, it is a behaviour-based penalty under Schedule 24 of the Finance Act 2007: a return completed with reasonable care—or in reliance on professional advice—should not be "careless", and HMRC must prove the behaviour before any penalty bites. Our guides to reducing HMRC penalties and what counts as a reasonable excuse explain the behaviour bands, the disclosure reductions and the defences.

One more practical note: an input-tax dispute is often preceded by HMRC asking for records under a Schedule 36 information notice. Responding carefully at that stage—keeping copies, evidencing payment and use—builds the very record your appeal will later rely on.

Key Legislation And Resources

Legislation

• Section 24, VATA 1994—meaning of "input tax" (used for the purpose of the business)
• Section 25, VATA 1994—the right to credit and deduct input tax
• Section 26, VATA 1994—input tax allowable; attribution to taxable supplies
• Section 73, VATA 1994—best-judgment and clawback assessments
• Section 83, VATA 1994—appealable decisions (input tax under (c); assessments under (p))
• Section 83G, VATA 1994—the 30-day appeal deadline
• Section 84, VATA 1994—the pay-first rule and the hardship exception
• Regulations 13 and 14, VAT Regulations 1995—VAT invoices and their required contents
• Regulation 29, VAT Regulations 1995—the claim, the 4-year cap (reg 29(1A)) and the alternative-evidence discretion (reg 29(2))
• Regulation 101, VAT Regulations 1995 and Regulation 106—partial exemption standard method and de minimis
• Regulation 111, VAT Regulations 1995—pre-registration input tax (4 years goods / 6 months services)
• VAT (Input Tax) Order 1992—blocked input tax: business entertainment (article 5) and motor cars (article 7)

Key Cases

• Mobilx Ltd (in administration) v HMRC [2010] EWCA Civ 517—leading UK authority: the "only reasonable explanation... connected with fraud" test; due diligence is not a safe harbour
• Fonecomp Ltd v HMRC [2015] EWCA Civ 39—contra-trading and indirect connections; applies Mobilx
• Tower Bridge GP Ltd v HMRC [2022] EWCA Civ 998—invalid invoice means no automatic right to deduct ("no ticket, no entry"); the evidence rules and Kittel both engaged
• GB Housley Ltd v HMRC [2016] EWCA Civ 1299—HMRC must actually exercise the alternative-evidence discretion; the tribunal's jurisdiction over it is supervisory
• Optigen, Fulcrum and Bond House (C-354/03, C-355/03, C-484/03)—an innocent trader's deduction is unaffected by fraud elsewhere in the chain
• Kittel; Recolta Recycling (C-439/04, C-440/04)—deduction may be refused where the trader knew or should have known of the connection to fraud
• Mahagében and Dávid (C-80/11, C-142/11)—the tax authority must prove knowledge on objective evidence; no general duty to vet suppliers
• Mecsek-Gabona Kft (C-273/11)—the same "knew or should have known" principle applied on the supply side (intra-Community zero-rating)

HMRC Guidance

• VAT Input Tax Manual (VIT)—HMRC's guidance on the right to deduct, the link to supplies, and acceptable evidence
• VIT31200: alternative evidence for claiming input tax—the regulation 29(2) discretion and the considerations HMRC applies
• VAT Notice 700 (the VAT Guide)—plain-English guidance on the evidence needed to claim input tax
• VAT Fraud Manual (VATF)—HMRC's codification of Mobilx and the "knew or should have known" test

On This Site

• VAT penalties and appeals—best-judgment assessments, the pay-first rule and hardship in detail
• Postponing payment during appeal—the hardship test where a section 73 clawback triggers pay-first
• Schedule 36 information notices—HMRC's records-gathering power, often the prelude to an input-tax challenge
• How to appeal to the tax tribunal—the filing mechanics, direct and indirect tax routes
• Writing grounds of appeal—structuring invalid-invoice, attribution and Kittel grounds
• Hok v HMRC—why "it's not fair" is not a ground, and the supervisory limit on reg 29(2)
• Reducing HMRC penalties—where an inaccuracy penalty rides on the disallowance
• What is a reasonable excuse?—the defence to a penalty added on top of a disallowance
• HMRC internal review—the free review step before the tribunal
• Understanding your HMRC appeal rights—overview of appealable HMRC decisions
• VAT registration when you run a UK company from abroad and when HMRC queries or delays your VAT registration—the registration siblings

This article is for informational purposes only and does not constitute legal or tax advice. For advice specific to your situation, consult a qualified tax adviser, accountant, or solicitor.