Reclaim VAT on Business Expenses: Guide For Small Business

Businesses often struggle to claim VAT refunds because they do not keep adequate records. But there are ways around it. “If you’ve got receipts, invoices, purchase orders, you can go straight to HMRC,” says tax expert Mark Boleat. “You can reclaim half of the value of goods bought for business use.” He adds that businesses can reclaim up to £1,500 per invoice, and the amount depends on how much the item costs. For example, if you buy a mobile phone handset for £200, you could reclaim £100 worth of VAT. If you spend £150 on a printer cartridge, you could reclaim £50. And if you spent £400 on a laptop, you could reclaim £200. However, he warns that you must keep detailed records of what you purchased.

The rules apply to both domestic and international purchases. So if you’re buying goods online, you’ll still be able to reclaim VAT. However, if you’re purchasing items abroad, you won’t be able to reclaim VAT unless you take out an export declaration. This allows you to reclaim the VAT paid on imported goods.

Selling taxable and exempt products

Partial exemption applies if you sell both taxable and exempted goods. You do not have to pay income tax on items such as books, CDs, DVDs, games, apps, etc., that are part of a course or program offered for educational purposes. However, you still owe sales tax on those same items.

You can use the following checklist to determine whether you qualify for partial taxation:

1. Do you sell goods that are both taxable and exempt?

2. Are the goods sold under a contract or agreement?

3. Is there a written receipt given to the customer?

4. Does the product come with a warranty card or similar documentation?

Purchases before registration

If you purchase goods before registering for Value Added Tax (VAT), you are allowed to reclaim VAT paid on them. However, you must register within four years of purchasing the goods. You are able to reclaim VAT paid on purchases made up to six months prior to the date of registration.

The following types of goods are eligible for VAT refund:

• Consumer electronics including computers, tablets, smartphones, etc.

• Clothing

• Furniture

• Home appliances

• Household items such as carpets, curtains, bedding, kitchen utensils, etc.

VAT Flat Rate Scheme

• You must make purchases of goods and services over £2,000

• You must keep records of your sales

• You must submit invoices to HM Revenue & Customs

• You must file returns

• If you don’t do any of those things, you won’t benefit from the Flat Rate Scheme.

The Flat Rate Scheme allows businesses to reclaim VAT on certain types of purchases. It applies to purchases of goods and services where the total cost does not exceed £2,000.

Vehicles

A vehicle bought for personal use can be reclaimed if you use it for work. If you hire a car for business use, you can reclaim any VAT paid. And if you buy a secondhand car, you can claim back any tax paid on it if it’s mainly for work.

Fuel costs

The price of petrol and diesel is determined by government. It is based on the cost of production of crude oil or natural gas.

There are multiple ways of reclaiming VAT on fuel purchases. Depending on how much fuel you buy, you may be able to claim it back against your tax return, or you may have to pay the fuel levy.

If you do not reclaim VAT, you will have to pay the fuel duty scale charge.

Additional vehicle costs

Vehicle costs are additional expenses you incur while owning a car. These include things like repairs, insurances, fuel, etc. This includes all business related driving and maintenance costs, including repair and off-road parking. You can claim back accessories too.

For example, if you buy a new car, you might pay £1,500 for it, plus another £200 per month for insurance. If you use the car for work purposes, you could claim back around £400 per month towards your tax bill.

You can do this either online or via HMRC’s My Tax Code app.

If you want to find out how much you can reclaim, check our calculator here.

Travel expenses

Employees count as employees for tax purposes.

For example, you can claim back VAT on your staff’s travel costs.

Self employed people don’t normally qualify for a refund on travel expenses.

What you cannot reclaim

Goods bought for personal use are exempted from VAT. So are good things like books, clothes, and furniture. But you cannot reclaim VAT on anything that’s only for your personal use.

You cannot reclaim VAT for anything you buy for work purposes – even if it’s only for your job. For example, if you’re buying a laptop for work, you’ll pay VAT on the cost of the computer itself. If you want to reclaim the VAT, you must declare the purchase as “for work”.

If you’re working away from home, entertainment and hospitality costs are taxable. They include things like food, drink, transport, accommodation, gifts, and other expenses incurred while travelling.

If you’re working abroad, you might be able to reclaim some of those costs. Consult your local HMRC office for advice.

Frequently Asked Questions

How far back can you reclaim VAT on invoices?

The rules around claiming back VAT on purchases made 4 years ago are fairly straightforward. However, there are some exceptions where it might be harder to prove that you were actually the person buying these items. For example, if you had a company name change during those four years, you could still reclaim the VAT. But what about if you changed your name? Or did you buy the goods for someone else? If you don’t know who paid for them, how do you prove it?

If you want to reclaim VAT on purchases made up to 4 years ago, you need to register with HM Revenue & Customs (HMRC). This requires you to provide proof that you were the legal owner of the goods at the time of purchase. This includes invoices, receipts, bank statements, credit card bills etc. Anything that proves you owned the item will suffice. You will also need to show that you were registered for VAT at the time of purchase and that you haven’t cancelled your registration since then.

You are allowed to reclaim VAT on goods you bought 4 years ago, even if you didn’t invoice yourself for them. So long as you kept invoices for the payment and they are dated within the previous six months, you can reclaim the amount. There are no limits on the number of invoices you can use to make a claim.

However, if you used another person’s invoice to pay for the goods, you won’t be able to reclaim the VAT. So if you paid for something with a friend’s credit card, you cannot reclaim the VAT.

In addition, you cannot reclaim VAT on anything that was acquired under a gift agreement. Therefore, if you gave someone a birthday present and paid for it with your own money, you cannot reclaim the tax.

Are all sales liable to VAT?

Sales of goods and services fall into one of three categories: exempt, taxable and zero rated. Exempt items include food and drink sold outside normal retail hours; medicines; books and newspapers; gifts; and certain services such as hairdressing, dental care, funeral expenses and legal advice. Zero-rated items are those where you don’t pay tax on the purchase price. These include most clothes bought online and mobile phone contracts. Taxable items include petrol, alcohol, tobacco, clothing and footwear purchased in shops.

The main types of transactions for which you might want to collect VAT are:

– Sales of goods and services

– Purchases of goods and services

In addition, there are specific rules about how to calculate VAT when calculating your profits. You must apply VAT to the sale of goods and services unless you are exempt, and you must apply VAT to purchases of goods and services unless they are zero-rated.

You can use the following guidelines to work out whether you need to register for VAT:

– If you sell goods or services to UK residents, you must register for VAT.