Every VAT-registered business knows it can reclaim VAT on business expenses. Most will expect to reclaim all the VAT they incur on expenditure, however, there are a number of exceptions to this general rule ...
VAT is a complicated area, and what you can and cannot reclaim often seems confusing and contradictory!
There are four types of VAT that cannot be reclaimed and I've detailed each of them below:
VAT incurred overseas
VAT can only be claimed when it is incurred in the United Kingdom. Any VAT paid overseas is non-deductible. It may be possible to reclaim overseas VAT, but only in the jurisdiction it was incurred in.
There are agencies which can facilitate repayment of VAT incurred overseas, but at the same time, there are countries that completely refuse to repay VAT to businesses not registered there.
Blocked input tax
There are certain expenditures that HMRC has blocked. These include cars, some building materials, items sold under a margin scheme, entertainment and domestic accommodation.
Cars are particularly tricky, with VAT not reclaimable on the purchase of a car unless you are a car dealer, taxi firm or driving school. If the car is exclusively for business use and not available for private use, VAT can be reclaimed.
50% of the VAT for leased or hired cards can be reclaimed, but not on the lease purchase or hire purchase agreements. Repairs and maintenance VAT can be reclaimed in full. VAT on fuel can be reclaimed in full when the VAT fuel scale charge is applied.
VAT can't be reclaimed on certain materials used in construction that are supplied as a zero-rated sale or on lease. Blocked input VAT included finished pr prefabricated furniture other than that designed for a kitchen.
VAT cannot be reclaimed on electrical or gas equipment other than those providing space or water heating. You also cannot reclaim VAT on carpets.
When it comes to margin schemes, VAT is not reclaimable on most items with these schemes. I'd recommend an in-depth discussion with your accountant and clarification from HMRC before attempting to make a claim.
For business entertainment (yes, that old nugget), VAT is not reclaimable where hospitality is provided to guests who are not employees. This includes product launches, presentations and other entertainments. It's interesting to note that VAT on entertainment of overseas customers can be reclaimed.
VAT can be reclaimed on employee entertainment, but if there is a mix of employees and other guests such as spouses, then the claim must be apportioned.
And finally, VAT cannot be reclaimed on the cost of providing accommodation for company directors. Accommodation provided to sole proprietors or partners in a business is regarded as a non-business expenditure and cannot be reclaimed either. VAT can be reclaimed where the domestic accommodation is provided to employees and this accommodation is necessary for their employment duties.
Private or non-business expenditure
When expenditure has a mixed business and private/non-business purpose, the related VAT should generally be apportioned and only the business element claimed.
When goods on which input tax has been claimed (such as an item of stock) are subsequently put to private or non-business use, there is a deemed supply for VAT purposes. Output tax is due on the cost of the supply to account for this private or non-business use.
Capital items, such as land, buildings, civil engineering works, computers, aircraft, boats, and other vessels which are purchased on or after the 1st of January 2011 are subject to an input tax adjustment to reflect actual use of the item over a period of years. This is called the capital goods scheme.
If a business makes except supplies, VAT cannot be reclaimed on all of its input tax, subject to a de minimis limit. This includes direct costs and a proportion of overhead expenses. Quite often, businesses don't recognise that they have made an exempt supply and common exempt supplies include:
property transactions, both sales and lettings
betting, gaming and lotteries
finance, including interest charges
health and welfare
some sports activities
some charitable and cultural activities
It is important for the business to ensure that the supply it makes does fall within any exemption, otherwise VAT will need to be charged, although this means VAT on expenses can be reclaimed.
As you can see, VAT is a complicated area, and what you can and cannot reclaim often seems confusing and contradictory. If you have any questions, then you should speak to your accountant before attempting to make a claim.
Until next time ...
ROGER EDDOWES Business Godparent
Would you like to know more?
If anything I've written in this blog post resonates with you and you'd like to discover more about VAT and what you can and cannot claim, it may be a great idea to give me a call on 01908 774320 and let's see how I can help you.
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Roger trained at Edward Thomas Peirson & Sons in Market Harborough before working at Hartwell & Co, followed by Chancery, as a partner. He started Essendon Accounts and Tax with Helen Beaumont in 2014 as a general practitioner with a hands-on approach.
Roger loves getting his hands dirty, working with emerging, small-to-medium and family businesses to ensure they receive the best possible accountancy advice. Roger utilises an extensive network of business contacts to leverage the best guidance and practical solutions.
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