There is no one who would dislike being able to recover part of their expenses, after all it is difficult to find any reason to refuse paying less taxes and having more money at hand. Although, it is not possible to evade taxes altogether, there remains a way of reclaiming VAT on expenses, which is definitely a great news for all entrepreneurs with many business-related expenses. In this article, we will explain basics about claiming back VAT on expenses in United Kingdom.
Claiming VAT can be done by VAT registered business on purchases related to business purposes. This simple sounding sentence can lead to huge misunderstandings, as conditions for qualifying purchases to be eligible for reclaiming VAT are quite strict. On the other hand, any unclaimed VAT amounts to overpaid VAT, which will not be returned without following procedures. In order to avoid such situation, it might be wise to prepare well for your future VAT returns as doing it correctly is definitely worth the effort involved.
How to claim input VAT back?
In order to complete VAT claim procedure, you must first be registered for VAT purposes. With VAT registration complete you can reclaim VAT paid by submitting VAT return. Additionally, you will need to keep a full tax record pertaining goods or services purchased, such as:
- VAT invoices and receipts
- Description and dates concerning purchase invoice
- Information about how purchase relates to your business
What about pre-registration input VAT and missed VAT?
With this comes a doubt – is it possible to claim pre-registration VAT? It is possible, however the condition of purchase being for business use remains. Goods purchased within four years and services within six months from your registration are eligible for VAT claim.
In case of missing VAT claim in correct VAT period, British Tax Law provides option of claiming input tax from up to four years back with the condition that total amount is less than 10,000.00 GBP or less than 1% of the value of your total outputs (VAT excluded) with the limit of 50,000.00 GBP. If the error exceeds that amount, filing form VAT652 will be required, so in order to avoid additional bureaucratic hassle, it is worth it to properly fulfil your tax obligations.
Condition for eligibility for claiming VAT
Not all items are qualified to be placed under claimed VAT and them being business related is the major obstacle as well as determining factor regarding how much of VAT can be claimed back. First troubling topic is shared use, if an item bought for business purposes is also used for personal use the proportion will decide how much VAT can be claimed.
Using an example of self-employed individual working at home with network broadband completely dedicated for work purposes and ¼th of the house used as workplace. Personal to business proportion will allow this individual to claim back full VAT on the cost of broadband and 25% on home utilities.
The prevailing problem in this aspect is proving that something was for business purposes. In case of employee travel expenses, it would be required to prove that it was for purposes of business, mileage would need to be documented as well. But the issues do not end there, worth mentioning is also one of the very common circumstances – commercial vehicle. If car is used for business purposes only, full tax on fuel can be reclaimed, however if it is for mixed purposes you are required to pay the correct fuel scale charge that is determined either through CO2 emission or the engine size (for cars registered before 1997). Using vehicle for business trips requires detailed mileage records, if you wish to reclaim VAT on fuel costs. Running and maintenance costs, such as repairs and parking, as well as accessories fitted for business use are generally eligible for VAT reclamation.
For purchased items it is generally possible to judge their eligibility for VAT reclamation by following simple rules:
- You are registered for VAT.
- Purchase is for VAT taxable business purposes.
- Goods, which:
- Are still in your possession or have been used to make other items you are still in possession of.
- Were not completely used up before you registered for VAT.
- Were not sold before you registered for VAT.
- Are not related to items exempt from VAT.
- Services, which:
- Are not related to items exempt from VAT.
- Are not related to items you disposed of before VAT registration.
The subject of claiming input VAT will definitely seem troubling for any individual first encountering this topic. Thankfully, there is alternative to doing it on your own – accountancy services offered by experts also include this aspect. Instead of troubling yourself over subject of whether certain item is eligible for classification of business expenses eligible for VAT refund you may employ aid of accounting firms – VAT on that can be claimed back as well.