The way in which HMRC works is confusing for many business owners – and claiming VAT back is one of those baffling areas.
Value Added Tax (VAT) is a complex area for businesses and many company directors admit to not fully understanding the rates and schemes.
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 we buy and sell. When VAT is applied to items used by consumers, such as takeaway food, it is already applied. But for business, you will often see prices with and without VAT added, such as 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 20% in the UK, which means 20% of the total amount is dealt with by 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 golden rule is that claiming VAT back is only allowable on goods and services that are used wholly and exclusively for your business. Whether that’s transport services, office supplies or accountancy costs, they count as they’re exclusively for the purpose of your business.
Where you partially use something – such as home broadband – 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 laptop, is now allowable. You cannot claim VAT back because it’s not an allowable business expense.
- Goods and services used for VAT-exempt products and services. Buying services, such as insurance services, or materials that your business then uses to create new products 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.
- 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 to 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. If filling in the online return you must enter how much VAT your business was charged in the three-month accounting period. This is known as input VAT.
HMRC needs you to calculate how much VAT our business has been charged during the same period. This is output VAT.
By completing your Return, HMRC automatically calculates if your’e due a refund for that accounting period.
If you need help with your VAT Returns, contact us today for details.