Businesses that are registered for VAT can claim back VAT as well as charging it. The most important rule is that you can only claim VAT on goods and services that are used exclusively for business. VAT is reclaimed through a VAT return submitted to HMRC.
Some goods and services are purchased only for the purpose of business. Examples may be office supplies, computers and equipment, travel and transport costs and services like accountancy. They can all have VAT reclaimed if they were bought for use only in business activities. For other expenses, such as mobile phone bills, part of the cost may have been incurred for non-business use. In this situation, you can only reclaim VAT for the business portion. Employees need to keep a record of which calls are for business and which for personal use and reclaim VAT only on the business amount.
Some types of purchase are not eligible for VAT reclaim. These include anything bought for private use and business entertainment. There are special rules for reclaiming VAT on certain items, such as computer equipment costing over £50,000 before VAT and other high value equipment. The VAT may need to be reclaimed over more than one year.
You can reclaim VAT on fuel purchases, but you can only reclaim 100% of the VAT if the fuel was only used for business journeys. If any part of it was used for non-business journeys, you can’t reclaim this portion. Employees must either keep a detailed record that shows what mileage was incurred on business and for other purposes, so the company can reclaim VAT on the business portion, or the company can pay the appropriate VAT fuel scale charge for the vehicle and then claim 100% of the VAT.
When reclaiming VAT, you must keep a complete record of all the purchases, with VAT receipts, and show how you worked out the proportion of the total that was used for business. VAT returns are generally submitted using a digital form, with reimbursements made directly back to the company bank account.
VAT is a complex area and there are a number of exceptions and special cases for reclaiming. Some items don’t attract VAT, or it’s charged at a non-standard rate. It’s important to account accurately for your VAT, as there may be penalties for inaccurate returns and you will have to repay anything that’s found to be owing.
Check the VAT rules that apply to your business carefully on the government website or seek advice from a qualified tax accountant or specialist. Using digital expense management software can help manage the administrative burden. When expenses claims are submitted online, the system may be able calculate the correct reclaimable amount automatically.
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