How to reclaim VAT ?
VAT-registered companies in the UK are obliged to charge value-added tax, better known as VAT, at a rate of 20%, 5% or 0% on the sale of their goods or services. The VAT collected from customers has to be reported and paid to HMRC through regular VAT returns. However, companies can also claim back the VAT that they have paid on goods and services bought for their business. Doing so is not necessarily straightforward. A few words of advice from Mooncard might be all you need to get to grips with the process of reclaiming VAT.
What you can and can’t reclaim VAT on
As with business expenses, there are very strict rules around when you can and can’t reclaim VAT and different schemes and rates apply. As a general rule, VAT-registered businesses can reclaim VAT on goods and services which are purchased wholly and exclusively for business use.
Obvious examples include the purchase of new office furniture, stationery, telephones, computers, raw materials, office equipment and so on, as well as things like accounting services, legal advice, transport etc - if they are used exclusively for the purposes of your business.
Where things get complicated is when business use and personal use overlap. For example, if your employees are allowed to use their business mobile phones for personal calls, company cars are also used at weekends for personal use, if staff work from home and use their personal internet access during business hours.
Where business and personal use overlaps, only the VAT on the proportion of the good or service which relates wholly to the business can be recovered. Obviously, goods and services which are purchased exclusively for personal use (such as a home computer) are not eligible for a VAT claim.
Another situation when VAT cannot be reclaimed is when entertaining people other than your own staff. This includes wining and dining clients, for example, and staff events where they are encouraged to bring partners or children along. VAT also cannot be reclaimed, as a rule, on the purchase of second-hand goods.
The rules on reclaiming VAT are complex. It might be worth taking advice from an expert before making a VAT claim.
Reclaiming VAT on past purchases
When you first register for VAT, you have an opportunity (and only one opportunity!) to reclaim VAT on eligible purchases made before that date. This is good news for those who started off below the VAT threshold and couldn’t claim back VAT on their initial investments but who later crossed the VAT threshold. As always, however, certain conditions apply so it’s important to find out what you can reclaim.
Businesses can claim back VAT on what is referred to as “capital purchases” made in the preceding four years. Capital purchases are goods such as office equipment, computers and other equipment that were purchased in the four years preceding VAT registration. The goods must still be owned by the company at the time the VAT claim is made. If you had to build new premises this may also apply, although most new builds are zero-tax rated.
At the time of registering for VAT, businesses can also make a one-off claim for the VAT on business services purchased in the previous six months. This might include accounting services, legal advice, etc.
VAT on fuel, vehicles, travel and more
There are specific rules on VAT when it comes to fuel, vehicles, travel and other miscellaneous categories of business expenses. It’s a good idea to delve into this in more detail to find out exactly what you can reclaim.
Claiming back VAT on fuel is a particularly tricky area. There are a number of different options that businesses can use to address VAT and fuel, depending on the nature of the business and the amount of mileage it incurs. In broad terms, the VAT on fuel can be reclaimed on the fuel consumed wholly and exclusively for business purposes. That, of course, means keeping meticulous records of mileage and a clear distinction between business and personal journeys. If fuel is purchased for mixed business and personal use, then all the VAT can be reclaimed on the condition that the government’s Fuel Scale Charge is applied and included in your VAT claim. The UK Government website contains useful information on how to calculate this charge. This will only apply to certain companies, however. For others, the Fuel Scale Charge may cost them more than the amount they can reclaim.
With regards to VAT on vehicles, this can be confusing and it’s important to investigate exactly what you can reclaim. The full VAT cost can normally be recovered on vehicles (vans, cars, trucks, etc.) which are bought wholly and exclusively for business purposes. However, the vehicles must strictly not be available for any personal use, and businesses have to demonstrate this is the case, for example by ensuring that all vehicles are parked overnight at the company premises, for example.
Different rules apply to leased vehicles. Usually, only 50% of the VAT can be reclaimed on such vehicles. Other exceptions can be made for vehicles used as taxis, as driving school vehicles or which are hired out as self-hire vehicles.
When it comes to VAT on food, drink, accommodation and travel expenses, most of the VAT can be reclaimed when the journey and related expenses were wholly and exclusively for business reasons. The VAT on transport, hot meals, hotel charges etc. can all be reclaimed. As always, however, there are exceptions. For example, almost all public transport in the country is zero-rated for VAT, which means that claiming back the VAT would be worthless.
You should also note that VAT cannot be reclaimed on standard journeys between the home and the usual place of work.
Finally, VAT can be reclaimed on gifts to staff and clients, as long as the total value of the gifts over twelve months does not exceed £50.
How to reclaim VAT
In line with good business practices, accurate records must be kept of every purchase, including the cost of VAT. Keeping meticulous records is essential if you want to make the most of what you can claim back, but also in the event of an inspection by the tax authorities. Receipts, proof of mileage and bank statements indicating all business transactions should all be kept.
In order to reclaim VAT, VAT-registered businesses in the UK must file a VAT return, usually every three months. This procedure is now completed entirely online, via the HMRC’s website.
When making your claim, you have to indicate how much you have paid in VAT on goods and services over the relevant three-month period. This is known as “input” value-added tax. Then, you indicate how much you have charged your clients for the goods and services you have provided over that same period. This figure is referred to as “output” value-added tax. It is the difference between these two figures that will determine whether you owe the government money, or whether you are eligible for a refund.
By completing your VAT return online, your VAT claim will be automatically dealt with, and any refunds are usually made within a matter of days.
Reclaiming VAT can be a bit of a minefield for businesses. Knowing exactly what to claim, keeping track of expenses and making the appropriate claim is not always straightforward. It is worth contacting an expert to explore your best options. Using a Mooncard corporate card can help streamline your record-keeping and make sure all your expenses are recorded appropriately.
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