VAT registration does not only mean charging VAT to customers. VAT-registered businesses may also be able to reclaim VAT paid on qualifying goods and services purchased for business use. Understanding what can and cannot be reclaimed is an important part of managing your VAT correctly.
The VAT your business pays when purchasing goods or services is commonly known as input VAT. If your business is VAT registered and the purchase qualifies under the VAT rules, you may be able to reclaim that VAT through your VAT Return.
For example, a VAT-registered business might purchase software, office equipment, professional services or other supplies from another VAT-registered business. If VAT has been correctly charged and the expense is for qualifying business purposes, the business may potentially include that input VAT in its VAT Return.
However, being VAT registered does not automatically mean that every VAT payment can be reclaimed. The expense must normally relate to your business activities and you need appropriate records to support the claim.
Common business purchases on which VAT may potentially be reclaimed include office supplies, business equipment, software subscriptions, professional services, certain business travel costs, repairs and maintenance and other goods or services used for business purposes.
The precise VAT treatment depends on the type of expense and how it is used. This is why businesses should avoid assuming that every receipt containing VAT automatically creates a valid VAT reclaim.
If something is used for both business and personal purposes, you can generally only reclaim the business-related proportion of the VAT. For example, if a mobile phone is used partly for business and partly privately, the VAT claim may need to reflect the proportion relating to business use. HMRC requires businesses to keep records supporting how the business proportion was calculated.
Similar considerations can apply when you operate your business from home. Where costs such as utilities relate partly to business use and partly to private household use, the VAT may need to be apportioned appropriately rather than reclaimed in full.
Business travel can also involve recoverable VAT in certain circumstances. HMRC states that VAT can be reclaimed on qualifying employee travel expenses for business trips, which may include transport, meals and accommodation paid for by the business. Specific conditions apply, so records explaining the business purpose of the expense should be maintained.
There are also expenses where VAT cannot normally be reclaimed. VAT relating purely to personal purchases cannot be claimed through the business. VAT associated with goods and services used to make exempt supplies may also be restricted, while business entertainment or hospitality provided to business contacts is another area where VAT recovery is generally restricted.
Businesses making both taxable and exempt supplies may be considered partly exempt. In these circumstances, the business may not be able to reclaim all of the VAT it incurs, and partial exemption calculations may be required to determine how much VAT can be recovered.
Vehicles can be another complicated area. Different rules can apply to purchasing a vehicle, leasing it, fuel and general running costs. Even where VAT cannot be fully reclaimed on the purchase of a vehicle, VAT on certain business-related running and maintenance costs may still potentially qualify.
Larger purchases can also require additional consideration. Certain high-value business assets can fall within the Capital Goods Scheme, meaning the amount of VAT recoverable may need to be reviewed over several years if the way the asset is used changes.
Good VAT invoices are an important part of supporting your claims. Your bookkeeping records should clearly identify the supplier, amount paid, VAT charged and business purpose of the purchase. Businesses should retain invoices and relevant documentation so they can support the amounts included in their VAT Returns.
Keeping business and personal spending separate can make VAT accounting considerably easier. Using a dedicated business bank account and correctly categorising expenses in your bookkeeping software reduces the risk of accidentally reclaiming VAT on personal transactions.
Businesses should also reconcile their VAT records regularly rather than trying to review several months of purchases immediately before the VAT Return deadline. Regular bookkeeping makes it easier to identify missing invoices and transactions where the wrong VAT treatment may have been applied.
Correctly reclaiming VAT can have a meaningful impact on business cash flow. Failing to include legitimate input VAT can mean your business pays more VAT than necessary, while claiming VAT incorrectly can create problems if HMRC later reviews your VAT records.
The goal should therefore be to reclaim the VAT your business is genuinely entitled to while maintaining clear documentation supporting each claim.
VAT recovery becomes more complicated when your business has a mixture of taxable and exempt activities, international transactions, substantial assets or expenses with both business and private use. Professional support can help determine the appropriate VAT treatment before transactions are included in a return.
At EasyFig, we help UK businesses organise their bookkeeping, review VAT transactions and identify qualifying VAT that may be reclaimed. We can also help prepare VAT Returns and ensure your VAT records are maintained accurately.
Want to make sure your business is reclaiming VAT correctly? Book a free consultation with EasyFig today.