What you need to know about claiming VAT back

What you need to know about claiming VAT back

The way in which HMRC works can be confusing and claiming VAT back is one of those baffling areas.

Value Added Tax (VAT) is a complex area and many company directors admit to not fully understanding the rates and schemes. In fact, a report says that businesses are losing 12% of revenue through unclaimed VAT.

What’s more challenging is claiming VAT back and knowing the instances where you can and cannot. To help, we’ve complied this useful guide.

What is VAT?

VAT is a tax that’s applied to certain goods and services. When VAT is applied to items used by consumers, such as food from takeaways, it is already applied. But for business, you see prices with and without VAT added, such as when buying from stationery companies.

Working out the tax is important so you charge clients correctly, and so that you pay the right amount to suppliers.

VAT is currently charged at the standard rate of 20% in the UK, which means 20% of on top of the sales price is owed to HMRC. Businesses that are VAT registered must charge and pay VAT. If you’re unsure about whether to register, here’s all you need to know.

Claiming VAT back

HMRC’s says claiming VAT back is only allowable on goods and services that are used ‘wholly and exclusively’ for your business. Whether that’s office supplies or accountancy costs, they count as they’re exclusively for the purpose of your business.

Where you partially use something – such as broadband at home – then you only claim a proportion of the VAT. This is equal to how much is used for your business.

There are exceptions to the rule. These include:

  • Personal use of goods and services. Putting something ‘through the company’, such as a new personal laptop, is allowable. You cannot claim VAT back because it’s not an allowable business expense unless the laptop is being used for your business..
  • Goods and services used for VAT-exempt products and services. Buying services, such as insurance services, are exempt from VAT. That means you cannot claim VAT back as it wasn’t originally charged.
  • Business entertainment costs. While you may make an expense claim for entertaining, you cannot claim the VAT. That’s because the people being entertained are not employees but you may be able to reclaim Vat for your own and other employee entertainment costs subject to specific rules.
  • Used goods. If you buy second-hand goods, they have different rules when it comes to reclaiming VAT.

Claiming VAT on previous costs

If you decide to register for VAT you can use your first Return to claim back VAT costs your business previously incurred. You only get one opportunity to claim back previous costs and there are limits.

Travel and food

If you or an employee travel solely for business reasons, such as visiting a client or attending a trade show, you can claim back VAT on travel costs. This includes hot food and accommodation, such as a hotel.

VAT cannot be claimed on travel costs to and from work, nor allowable on public transport as it’s zero-rated.

Keeping your records

Keeping accurate records is essential when claiming back VAT. You’ll need to show evidence of payment with either:

  • Receipts: Retail receipts don’t always include VAT but can be used if the purchase was less than £250. You need to calculate the VAT element.
  • VAT invoices: These show the rate and amount you’ve paid from a VAT-registered business. It also includes a VAT number.
  • Proof of transaction: It is still possible to claim VAT even without a receipt. You need proof of purchase, such as a bank statement, that shows the amount paid.

How to claim it back

You must complete a VAT Return, usually each quarter. Remember that from April 1 2022, all VAT registered businesses not already operating under Making Tax Digital (MTD) will have to:

  • Sign-up to MTD
  • Keep their records digitally (for VAT purposes only)
  • Submit their VAT return information to HMRC through MTD compatible software

This includes businesses below the £85,000 threshold which are registered for VAT. If your business has been granted a MTD exemption, it will still apply beyond 1 April 1 2022. If you have not already applied for an exemption and think you may be eligible, you may still be able to apply. But a word of warning, the conditions are narrow.

If you need help with your VAT Returns, contact us today for details.