What is input VAT?

In practice, in the UK

Not every purchase generates recoverable input VAT, even when VAT was charged on it. Purchases used partly for private purposes, certain categories such as business entertaining, and purchases related to exempt rather than taxable supplies either restrict or block recovery entirely, and a business making both taxable and exempt supplies has to apportion its input VAT between the two using a method HMRC accepts. The evidence matters as much as the eligibility: HMRC expects a valid VAT invoice for the amount reclaimed, not just a bank statement showing the payment, and reclaiming without one is one of the more common findings in a VAT inspection.

In Odoo

Odoo tracks input VAT on each purchase through the tax position and tax applied to the bill, feeding it automatically into the relevant part of the VAT return. Where a purchase needs to be apportioned or restricted — a mixed-use cost, or a purchase linked to exempt supplies — that adjustment usually has to be made deliberately at the point of entry, since the system will otherwise assume full recovery is available.

Common mistakes

• Reclaiming input VAT on the strength of a bank statement or receipt that does not amount to a valid VAT invoice.
• Recovering VAT in full on costs that are only partly used for taxable business activity.
• Ignoring partial exemption where a business also makes exempt supplies, and reclaiming as if every purchase were fully recoverable.