My VIP Tax Team VAT question of the week: VAT implications of a business buying a hearing aid for an employee.

While HMRC do have specific guidance on this for Benefits in Kind, there is no specific guidance for VAT purposes so any recovery relies on the normal rules for input tax.  My initial starting point would be why has the business purchased the hearing aid for the employee.  Assuming it’s not entirely philanthropic we can assume the purchase is to enable the employee to carry out their duties and will in some way benefit the business. The reason is important because Input tax can only be claimed after it has been established that the cost was incurred for the purpose of the business.

HMRC’s VAT Input Tax Manual tells us that for input tax to be deductible it must be linked to the making of taxable supplies.  Specifically, VIT21000 states that general costs have a direct and immediate link to all of a business’s supplies because they are cost components of the business as a whole.  It would not be unreasonable to assume a hearing aid necessary for an employee to carry on performing their normal duties in the business would be part of the general overheads of that business.

Having established there is input tax to reclaim, the next point to consider is the extent it is used for business purposes and given it is for an employee, whether there is any potential private use.

The Input Tax Manual VIT25000 states the business must decide how to treat mixed use items at the time VAT is incurred on purchasing the goods. This will determine the extent to which the business can recover VAT, subject to any business use in making exempt supplies.

The business has a choice as to how to treat these goods for VAT purposes. A business might:

• leave the goods wholly outside the business and treat them as wholly private or non-business assets – in this scenario no VAT is recovered as input tax (see VIT25220); or
• bring the goods partly within the business and apportion the tax incurred on them – as such the business will then only recover that proportion of the VAT that relates to its taxable business use. (See VIT25240); or
• treat certain types of goods as wholly business using the Lennartz mechanism – as a result the business will be able to recover all of the VAT incurred, including any that relates to planned private use. If this option is adopted the business must pay an output tax charge for each VAT return period to reflect any private use in that period. If the Lennartz mechanism is adopted VAT will be due in full if the asset is disposed of as it is a wholly business asset. (See VIT25280).

Should the business decide to apportion the input tax on the purchase of the item the law does not specify that any particular method of apportionment is used. There are no regulations that let HMRC impose the method they consider most suitable. The only legal requirement is that there should be an apportionment that fairly and reasonably reflects the different purposes to which the goods or services are put. The Input Tax Manual at VIT25450 discusses methods of apportionment available to businesses and what is acceptable to HMRC.

Finally, Regulation 29(2) of the VAT General Regulations 1995 details the evidence required for deducting input tax. In most cases this will be a proper VAT invoice from the supplier detailing the supplies made and the relevant value and applicable VAT amounts.  This will be important in this instance because although the hearing aid itself will be standard rated, the examination, testing and dispensing will be exempt for VAT purposes and there will be no input tax to deduct on these charges.  In an ideal world a VAT invoice would be to the business, but as it is unlikely that the business will be contracting for the supply, if the business holds the employee’s invoice and can demonstrate it has paid for the supply it would not be unreasonable to recover the proportion of the VAT that relates to its taxable supplies.

It may be worth mentioning at this point that hearing aid dispensers, like opticians, have special methods they can use for calculating the output tax due on their goods and services.  One method is to disclose actual charges on an invoice or till receipt for the exempt services and the standard rated goods, but another is based on costs incurred, and in this instance a single price will be charged to the customer, and it may not be possible for a customer to identify the VAT element included.

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