Inconsistency is often experienced between what you may be able to claim in relation to VAT versus what you can claim for tax relief.
The following is a summary of common VAT errors and misunderstandings which we regularly come across. Please note that in these notes, you will see VAT on sales referred to as output tax (and net sales as net outputs) and VAT on purchases referred to as input tax (and net purchases as net inputs). The following points are in no particular sequence or order:
- VAT on entertaining: You can reclaim VAT on staff entertaining, but not client or other business entertaining. If your employees are acting as hosts (e.g. taking clients to a sports event), then the input tax on the employee costs is counted as disallowable generally. See //www.gov.uk/government/publications/vat-notice-70065-business-entertainment/vat-notice-70065-business-entertainment Slightly surprisingly, you ARE able to reclaim VAT on business gifts up to the value of £50 per recipient per year, even if they are food or alcohol where you will not obtain corporation tax relief.
- VAT on car purchase – for nearly every business, input tax on the purchase of a car is disallowable. The exceptions are self-drive hire companies, licensed taxis and driving schools. However, if you lease a car, then you can generally reclaim 50% of the VAT charged. For example, if the lease is £200+VAT (£40). You can reclaim £20, so the effective cost id £220. Either way though, you can reclaim VAT on the running costs of a company owned vehicle. Note you should consider fuel separately (see below).
- VAT on fuel – where a business pays for fuel, input tax may be recovered. However, if this includes fuel for private journeys, then you must either claim only the correct proportion of VAT, or pay the Road Fuel Scale Charge. It is not uncommon for the Road Fuel Scale Charge to exceed the VAT input, thus rendering this reclaim ineffective, so it is important to consider your individual circumstances.
Interestingly, where you reimburse mileage to employees (including yourself) for using their own car for business journeys, you are able to reclaim VAT on the part of the 45p/25p mileage rate which relates to fuel. This is known as the Fuel Only Mileage Rate, and is updated quarterly. If you have 5 staff doing 500 business miles per year in a 2 litre diesel car, this could equate to over £150/quarter in VAT to reclaim. Please note that you must ensure that employees include a VAT receipt for their fuel with the expense claim.
- Reclaiming VAT when no VAT is charged: common incorrect reclaims are:
- Rail and air travel (no VAT charged).
- Parking/road toll/congestion zone etc charges (may or may not be VAT charged – look for a VAT number on the receipt).
- Postage (no VAT except for certain courier type services).
- Insurance (Insurance Premium Tax incorrectly claimed back as VAT – this is not allowed!)
- Purchases from Amazon and retailers (which may or may not carry VAT depending on the status of the retailer – get a VAT receipt!)
- Reclaiming European VAT (e.g. on hotels, Facebook or Google) – this can only be reclaimed via a separate “sixth directive reclaim” via HMRC. Note that for Facebook and Google, you can avoid being charged the EC VAT and having to reclaim or suffer it by advising you are a business and providing a VAT registration number.