Theory and Practice
UK VAT recoverability is governed by VAT law and partial exemption principles. VAT incurred on inputs used to make taxable supplies is generally recoverable, while VAT linked to exempt activities may be restricted (HMRC, 2022; HMRC, 2025).
IFRS 16 view of non‑refundable VAT on lease payments
Although irrecoverable VAT is commonly treated as part of the cost of goods and services (e.g. stationery), lease liabilities under IFRS 16 and amended FRS 102 are measured based on payments to the lessor for the right to use the asset. Because VAT is generally viewed as a statutory levy rather than lessor consideration, many entities exclude non‑recoverable VAT from lease measurement and recognize it as an expense when incurred. However, IFRS does not contain explicit prescriptive guidance, and this conclusion relies on judgment.
Under IFRS, the IFRS Interpretations Committee considered how a lessee accounts for non‑refundable VAT charged on lease payments and noted that VAT is a levy collected and remitted to the tax authority, not consideration paid to the lessor for the right to use an asset (IFRS Interpretations Committee, 2021b).
Outcome: VAT is generally excluded from lease payments used to measure the lease liability. Recoverable VAT is recorded as a receivable; irrecoverable VAT is treated as a cost outside the lease liability measurement (IFRS Interpretations Committee, 2021b; HMRC, 2025). However, IFRS does not contain explicit prescriptive guidance, and this conclusion relies on judgment. Therefore, Sage Intacct Lease Accounting allows users to either include or exclude VAT from Lease Liability valuation.
Amended FRS 102 (effective 1 January 2026): lease model changes, VAT logic does not
The Periodic Review 2024 amendments to FRS 102 substantially revise lessee lease accounting in Section 20, bringing most leases on balance sheet through a right‑of‑use asset and lease liability model, effective for periods beginning on or after 1 January 2026 (FRC, 2024; PwC, 2024).
These amendments do not introduce a VAT‑specific exception. VAT treatment continues to follow VAT recoverability rules and principal/agent logic, meaning VAT is not treated as lease consideration simply because leases move onto the balance sheet under amended FRS 102 (HMRC, 2025; IFRS Interpretations Committee, 2021b).
UK VAT for Not‑for‑profit entities (charities and other partly exempt entities)
Not‑for‑profit entities frequently have restricted VAT recovery because they make exempt supplies or engage in non‑business activities. UK partial exemption methods determine how much input tax can be recovered (HMRC, 2025).
Lease implication: recoverable VAT is recorded as an input VAT receivable; irrecoverable VAT remains a cost and is typically expensed as incurred rather than embedded in the lease liability, consistent with the IFRS Interpretations Committee discussion of VAT as a levy rather than lease consideration (HMRC, 2025; IFRS Interpretations Committee, 2021b). However, IFRS does not contain explicit prescriptive guidance, and this conclusion relies on judgment. Therefore, Sage Intacct Lease Accounting allows users to either include or exclude VAT from Lease Liability valuation.
Amended FRS 102 changes lease recognition but does not create a new VAT rule for charities; VAT recovery remains a tax determination, not a lease accounting determination (FRC, 2024; HMRC, 2025).