VAT a business can reclaim on its costs

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A UK VAT-registered business can reclaim VAT on costs bought for business use, provided it holds the required records and a valid VAT invoice. It cannot reclaim VAT on private costs, costs linked to VAT-exempt supplies, or most business entertainment.

Input tax is the VAT a business pays on purchases. It is deducted from output tax, the VAT charged on sales, through the VAT Return.

Cost or situation	VAT position	What supports the claim
Business-only purchase	Claim the VAT	Valid VAT invoice and business records
Mixed business and private use	Claim only the business share	Record showing how the split was calculated
Employee business travel	Claim VAT on transport, meals and accommodation paid by the business	Invoices for the actual costs
Flat employee allowance	Do not claim VAT	A fixed payment is not a supply to the business
Business entertainment	Usually blocked	Apply the entertainment rules before claiming
Staff party or team event	VAT can be input tax	Split costs where guests also attend
Car purchase	Usually blocked	Check whether an exception applies
Flat Rate Scheme purchases	Usually cannot claim VAT	One qualifying capital-goods purchase can be an exception

How a normal VAT claim works

Put reclaimable VAT in box 4 of the VAT Return. The total reduces the VAT due from the business, because input tax is set against output tax.

A valid VAT invoice normally supports the claim. HMRC says a business that does not have one should first ask its supplier for it.

Where a supplier cannot provide an invoice, HMRC may accept other evidence. The business must show it tried reasonably to obtain the invoice and that there is no risk of fraud.

Where an item has both business and personal use, retain the calculation used to separate the two.

VAT paid before registration may be reclaimed on goods bought within 4 years if they remain with the business, or form part of goods it still holds. Services bought within 6 months before registration may also qualify.

Input tax normally has a 4-year limit, measured from the due date of the return when entitlement first arose. If the invoice was missing at the time, a claim may go into a later return within that limit.

A business that has reclaimed VAT on an unpaid purchase must repay it if the supplier remains unpaid after 6 months. HMRC calls this clawback.

Costs with business and private use

Only the business element can be claimed where a cost has private use.

For example, GOV.UK gives a phone used equally for business and personal calls. The business can recover 50 per cent of the VAT on both the handset and service plan.

A home office may need the same treatment. If the office occupies 20 per cent of the floor space, 20 per cent of the VAT on utility bills can be reclaimed.

Use the VAT fraction when a bill already includes VAT. At the 20 per cent standard rate, VAT is one-sixth of the VAT-inclusive total, as shown in how UK VAT is worked out on a price.

For example, a VAT-inclusive phone bill of £120 contains £20 VAT. If business use is 50 per cent, the reclaim is £20 multiplied by 50 per cent, which equals £10.

For a phone supplied to an employee for business use, the VAT on its purchase or lease is input tax, even if private use is allowed. VAT guide (VAT Notice 700) sets out that treatment.

Where staff may make private calls without charge, split the VAT on the call package and other charges. Claim only the business share of that VAT.

Travel, motoring and entertainment

VAT on employee business travel can be reclaimed where the business pays the cost. This can include transport, meals and accommodation.

Hotel and similar accommodation for a business trip away from the normal workplace is input tax. For subsistence, self-employed people receive the same treatment as employees.

A flat-rate expense payment does not carry reclaimable VAT, even where an employee holds invoices. HMRC’s position is that no supply is made to the business.

Buying a car normally does not allow a VAT claim. Exceptions include a car used primarily as a taxi, driving-instruction vehicle or self-drive hire car, and a car used solely for business with no private availability.

Commuting from home to work counts as private use unless the workplace is temporary. VAT on repairs and off-street parking connected with the business can usually be reclaimed, even if the VAT on buying the vehicle was blocked.

Where a vehicle has business use only, the whole VAT amount on its fuel may be reclaimed. For a vehicle with business and private use, claim all fuel VAT and account for the fuel scale charge, or claim VAT only on fuel for business journeys and retain detailed mileage records.

Business entertainment (VAT Notice 700/65) blocks VAT recovery on hospitality for people who are not employees. HMRC includes food and drink, theatre tickets, sporting events, clubs and nightclubs within entertainment.

This block covers entertaining UK business contacts and overseas people who are not customers. Entertainment for an overseas customer may qualify if it is reasonable in scale and character, though private benefit creates an output tax charge that cancels the recovered VAT.

Staff parties, team-building events and staff outings are input tax. Where employees and other guests attend, claim only the VAT relating to employees.

Directors and partners attending alongside employees can be included in a staff event claim. An event solely for directors or partners does not create reclaimable input tax.

Partly exempt businesses

A business cannot reclaim VAT on goods or services used to make VAT-exempt supplies. A business selling both taxable and exempt goods or services is partly exempt and must use the separate calculation for that position.

What changes on the Flat Rate Scheme

The VAT Flat Rate Scheme changes the normal purchase-VAT position. A business pays VAT using a fixed percentage of VAT-inclusive turnover and generally cannot reclaim VAT on purchases.

The usual exception is capital expenditure goods bought in one purchase for £2,000 or more including VAT. Capital goods are assets used in the business and not used up, such as a van or computer.

Several items bought from one supplier at the same time count as one purchase. VAT cannot be claimed for services, for more than one purchase covered by individual invoices, or for a purchase below £2,000 including VAT.

Claim qualifying capital-goods VAT outside the Flat Rate Scheme in box 4. For example, a qualifying purchase costing £2,100 including VAT contains £350 VAT, because £2,100 multiplied by one-sixth equals £350.

The turnover condition for joining is expected VAT-taxable turnover of no more than £150,000, excluding VAT, over the following 12 months. Other Flat Rate Scheme conditions may also apply.

A first-year VAT-registered business receives a 1 percentage point reduction from its flat rate.

Accountancy, book-keeping, computer consultancy and data processing have a 14.5 per cent flat rate. A limited cost business uses 16.5 per cent whatever its sector, and may pay more VAT than under standard accounting.

For the limited cost test, relevant goods cost less than 2 per cent of turnover, or more than 2 per cent but less than £1,000 a year. Food and drink for owners or staff, and capital expenditure goods, do not count in that test.

What to do next

Keep the VAT invoice, the cost record and any calculation used for a business-use split. Put the VAT that qualifies in box 4 of the VAT Return.

Check entertainment, vehicle and employee-expense costs before including them. A Flat Rate Scheme business should separate any qualifying capital goods purchase from ordinary purchase costs.

If VAT has been claimed on an unpaid purchase, check whether six months have passed. Input tax must then be repaid to HMRC.

Common questions

Can a business reclaim VAT without a VAT invoice?

Usually, no. Ask the supplier for an invoice first, though HMRC may accept other evidence where the business made reasonable efforts to get one and fraud is not a concern.

Can VAT be reclaimed on a client meal?

VAT on business entertainment is generally blocked. Staff subsistence while working away from the normal workplace is treated differently from entertaining business contacts.

Can a Flat Rate Scheme business reclaim VAT on a computer?

It may claim VAT if the computer forms part of one capital-goods purchase costing £2,000 or more including VAT. More than one purchase on individual invoices, services and purchases under £2,000 including VAT do not qualify.

Where does reclaimable VAT go on the VAT Return?

Reclaimable input tax goes in box 4.

Sources

• GOV.UK: Charge, reclaim and record VAT: Reclaim VAT on business expenses
• GOV.UK: VAT guide (VAT Notice 700)
• GOV.UK: VAT rates
• GOV.UK: Business entertainment (VAT Notice 700/65)
• GOV.UK: VIT42500 - Specific issues: subsistence - HMRC internal manual
• GOV.UK: Motoring expenses (VAT Notice 700/64)
• GOV.UK: How to fill in and submit your VAT Return (VAT Notice 700/12)
• GOV.UK: How to correct VAT errors and make adjustments or claims (VAT Notice 700/45)
• GOV.UK: VAT Flat Rate Scheme: Overview
• GOV.UK: Flat Rate Scheme for small businesses (VAT Notice 733)
• GOV.UK: FRS6500 - Anti-Avoidance Rules: How is VAT reclaimed on ‘capital expenditure goods’? - HMRC internal manual
• GOV.UK: VAT Flat Rate Scheme: Who can join
• GOV.UK: VAT Flat Rate Scheme: Work out your flat rate