The UK's VAT system isn't exactly known for its simplicity. Quite the contrary – it can be a minefield. So what, exactly, can you reclaim VAT on? We've already examined VAT reclaiming on motor vehicles and fuel, and we thought businesses like yours would also appreciate a plain language look at VAT reclaim in general. Here's what you need to know.
What can you claim back VAT on?
As a business you can usually claim back the VAT you have paid on goods and services bought for business use, for which you have a valid VAT receipt. No receipt, no reclaim!
If the item you buy is also for personal use, you can only claim back a proportion of the VAT paid, in other words the actual business element. Mobile phone bills are a good example. You might use your mobile 50% for work and 50% for personal, in which case you can only claim back the VAT on half of the purchase price and plan. Having said that, you can't reclaim VAT without adequate records to support the claim, which clearly show how you calculated the percentage of business use. And it goes without saying you must have kept the VAT receipt.
What is a valid VAT receipt?
A valid VAT receipt includes the name, address and VAT number of the supplier, your name and address, the date, a description of the goods or services, the cost before VAT, the VAT itself, and the total amount that contains the VAT.
Having said that, many VAT receipts are actually a shorter version, simply containing the total amount paid, the seller's name and VAT number. Here, you need to figure out the VAT within the bill, which you do by multiplying the total by 20/120 or visiting an online calculator such as http://www.vatcalculator.co.uk/ . This is the amount you can reclaim.
What about Europe?
What can you reclaim for EU business expenses? You can't claim for goods bought in EU countries, although you might be able to reclaim VAT paid under the electronic cross-border refund system. You can reclaim VAT on products and services bought during the refund period, plus VAT on goods imported to Britain during the same timescale.
You can't claim for VAT that has been invoiced wrongly, where VAT has been levied on sending goods to another member state, or exported items outside the EU. And as we mentioned in our previous motor vehicle and fuel VAT post, you can't claim back VAT on the purchase of a car.
The things you cannot reclaim VAT for
You can't reclaim VAT on insurance, salaries, PAYE, postage, bank interest or business entertainment. But VAT on entertainment for overseas customers can sometimes be reclaimed when that entertainment is very basic.
You can't claim for anything you've bought exclusively for personal use, or the products and services your business uses from VAT-exempt supplies. Items you buy under a VAT second-hand margin schemes and business assets transferred to you as a going concern are also exempt from VAT reclaim.
Not registered for VAT?
When your business isn't registered for VAT, you don't have to charge VAT to your customers. But you also can't claim any VAT back. That's why so many smaller businesses try to stay under the VAT radar, under the registration limit (the current threshold is £83,000 – see https://www.gov.uk/vat-registration/when-to-register for more information) . Charging VAT to a customer who isn't registered for VAT means they have to bear the full cost.
What about VAT post-Brexit?
VAT is just one of the many things that Brexit will change. Our current VAT rules are based on EU law, which means VAT is applied according to European directives and the European Court of Justice. After Brexit we will probably take full control of the nation's VAT policies. This could mean changes in the standard VAT rate – the government might, for example, decide to lower the VAT rate to less than 15%. Exemptions might also change, with the government potentially introduce zero-rate of VAT on some products, services or entire sectors. And we may see different VAT rates applied to different services. At the moment, though, we really don't know.
Do you need support with the VAT system?
We've made things as clear as we can, but there are plenty of fiddly exceptions to these rules, exemptions, margin schemes and more, and it's no wonder so many people hand the whole VAT thing over to us. Unless you have the time, expertise, experience and confidence to know you're getting it right every time, it's a sensible move. If you need VAT support, we're here to help.
To find out more contact Karen on 01273 661913