Input tax recovery: what is deductible and what is not

The idea is simple enough: you collect tax on your sales, you pay tax on your purchases, and you remit only the difference. But the word "purchases" is where all the difficulty sits — the law does not recognise everything you paid.

The three conditions for recovery

Before any detail, recovery requires three things together; none substitutes for another:

• The purchase is for the purposes of a taxable activity — not personal, not for an exempt activity
• You hold a compliant tax invoice issued in the name of the business
• You have paid the consideration, or intend to within the prescribed period

Items blocked even when they are for the business

Certain categories are expressly excluded, on the logic that personal benefit is mixed into the commercial purpose in a way that resists separation:

• Entertainment and hospitality provided to customers, partners and visitors
• Vehicles made available for personal use, together with their running and maintenance costs
• Goods and services acquired for employees' personal benefit in defined cases

These are precisely what we most often see recovered in good faith on a first return, because they are genuine costs the business paid for business reasons — and they are still blocked.

Mixed expenses: a proportion, not all and not nothing

Rent on an office used for both taxable and exempt activity, or a service shared between the two, is neither fully recoverable nor fully ignored. It is apportioned on a basis reflecting actual use, and the proportion is revisited periodically because it moves as the activity mix moves. Businesses that pick a side — all or nothing — create a difference that grows each period.

Why exempt versus zero-rated matters here

A zero-rated supply is a taxable supply, and its maker keeps the right to recover the related input tax in full. An exempt supply cuts that right off. So classifying a supply as exempt when it is zero-rated — or the reverse — does not merely move a box on the form; it changes the amount you get back.

Imports and the reverse charge

On import the tax is accounted for by the importer: declared as output and recovered as input in the same return, so the cash effect is nil where recovery is full. The common error is recording one leg and forgetting the other — leaving a liability with no relief, or a recovery with no basis.

What protects your position

• Attach every recovery to its document in the system at the moment of entry, not at filing
• Separate blocked-expense accounts in the chart of accounts from the start
• Document the basis of apportionment for mixed expenses and revisit it periodically
• Re-test the classification of your supplies whenever you add a new activity