VAT on Business Expenses – What You Need to Know

VAT on Business Expenses – What You Need to Know

Expenses are one of the most perplexing aspects of VAT, so don’t worry if you’re finding it all a little overwhelming.

In this piece, we’ll walk you through the minefield of VAT on expenses and highlight the types of issues you can face in real life that you may be confused about.

VAT on Expenses: Where to Start

It’s important to note that expenses are handled the same as any other purchase you make for your company; the fact that they’re paid for by a member of staff makes no difference.

There is one easy guideline to remember: if the expense was incurred totally, exclusively, and necessarily for the benefit of the business, you can claim it as an input on your VAT return.

It’s crucial to keep in mind that HMRC may have a different definition of what’s ‘for the business.’ If any of these conditions are broken, you’ll need to treat the expense differently, which is what this piece is all about.

In general, a solid expenses system will contain all the features needed to deal with VAT; all you have to do now is make sure you’re using the functions correctly. Once you’ve got a decent system in place, you’ll need to draft and distribute a detailed yet easy-to-understand expense policy to your staff.

Make sure your new expenses policy is distributed to all employees and that any queries they may have are answered. After all, you can’t complain if an employee violates company policy on expenses if you haven’t told them what it is.

Should You Claim VAT on That Expense?

This is where the majority of people experience issues, so we recommend using a layered approach.

For the first ‘layer,’ you will identify expenses that are obviously claimable – that is, VAT has been paid, and the expense was solely for your firm.

For example, an employee might use their own credit card to purchase advertising on behalf of the firm, perhaps to score a deal. This was obviously all about the firm, and is clearly a VAT reimbursable expense.

The next ‘layer’ is to determine if the expense was incurred partially for the benefit of the company.

As an example, employees frequently agree with their employers that they will use their personal mobile phones for work or that they will pay for software to use on behalf of the firm and then claim the costs as expenses. In these instances, you may be able to reclaim the percentage of the cost that is related to the quantity of business use.

The final ‘layer’ is determining whether or not the expense is reimbursable at all.

Is the spending solely for the benefit of the employee? Is it a matter of entertainment or subsistence? Was it a cost incurred on the client’s behalf? Other rules may apply in these situations, and that is what a big portion of this post is about.

Understanding VAT on expenses can be simple: if the expense had VAT added to it, you can prove it, and it was solely and exclusively for the business, you can claim it as an input on your VAT return and recover the tax. However, if the expense is ‘maybe’ not a standard VAT reimbursable expense, these restrictions, you’ll need to carefully consider your strategy and ensure that you understand the guidelines.

When we say ‘claimable, in what follows’ we’re presuming they match the ‘whole and exclusive’ requirements and that you have documentation from a VAT-registered vendor. Naturally, we’re also assuming that the VAT on the things we mentioned was applied at the current rate – remember, you can’t get VAT back at the ordinary rate if the item is zero-rated or exempt!

Office Related Expenses

This is a rather simple issue. Pens, folders, and other office supplies will be claimable. It makes no difference where they were purchased or utilized, so an employee might work from home and have things delivered there.

They could even pay for an office order with their own credit card, possibly to get a discount for paying right away. This is true for both payments that are expenses and payments that are assets. In terms of VAT, there isn’t much of a difference between these.

Services Supplied to the Business

Frequently, company directors will pay for items that are clearly for the company, but they will either use the wrong card or use cash. Happens all the time, even in our company. They could buy ads, pay for subscription services like software, or pay the window cleaner in cash (provided he’s VAT registered, of course). All of this is eligible for VAT reimbursement.

Travel

This is also a common business expense to consider for VAT. The easy part is when the employee is going to a business meeting and needs to take a taxi. You should be aware, however, that not all travel includes VAT.

Train tickets and underground tickets, for example, are exempt from VAT. Receipts are provided by all reputable taxi companies, and these receipts will include a VAT number if appropriate. Uber (and other ride-sharing companies) are a different story. Uber argues that its drivers are self-employed, therefore each has their own VAT status, despite the fact that you buy from a single platform. This is definitely one to keep a careful eye on.

Business Entertainment

This is a tricky one that produces a slew of issues for people. Let’s be clear about something. Business entertainment isn’t subsistence. When a company employee is required to work away from the office for an extended period of time, the company can pay them for their meals. This is subsistence. Business entertainment occurs when a company pays for an evening dinner or an event for employees, potential suppliers, or consumers.

Companies frequently supply food for meetings, which is acceptable as long as it is of a basic kind. If, on the other hand, the firm decides to engage a Michelin-starred chef and supply tons of bottles of champagne, this definitely does not fit within the category of being “reasonable.”

Similarly, if a meeting is held outside of the office, this can be accommodated, regardless of whether the meeting is entirely for workers or not.

However, general entertainment is a different story.

For instance, your business might invite suppliers or customers to a golf outing or a football game. Because HMRC believes that these types of events are unlikely to be strictly business-related, you will not be able to claim VAT.

Of course, you could argue that the event served multiple functions. Perhaps you leased a room at the golf club for a business conference and then went golfing afterwards. In that situation, the portion of the business meeting would be permissible, but the golf outing would not.

Employee Entertainment

This is another issue that requires cautious attention. If the person being entertained is an employee of the company and the entertainment is relevant to their job, it is VAT-deductible.

An example of this would be if the company pays for a meal out in exchange for excellent performance. You can claim VAT back on everything you provide for your employees (excluding an annual event). Some companies, for example, arrange for pizzas to be delivered on the last Friday of the month. The food must be offered to all employees and cannot be limited to only the directors, but as long as it is, you can claim back the VAT.

Another example? If the firm organizes a team-building day away from the office and provides food, the food is also acceptable because it is classified as subsistence.

However, there is one caveat: these cannot be restricted to only the firm’s directors or partners; they must be open to all employees. Restricted events are not eligible for reimbursement. Also, keep in mind that the requirements for VAT and income tax are frequently incompatible. For tax purposes, for example, there is a restriction on the amount that can be spent on yearly employee activities.

Goods For the Business

It’s possible that the employee purchases items that the company needs to do its business. Let’s say a web design firm sells a bundle that includes site design, development, and content. One of the directors creates the design and then uses their credit card to pay freelance developers, photographers, and writers from a freelancer marketplace to add to the package. To put it another way, these are products that would be considered “cost of sales.”

The expense certainly fulfills the business purpose test in this scenario.

It’s also common for a senior employee to need to buy items from a local supplier on short notice in order to complete a job, and they do so and then claim the money back later. Again, this is all totally legal, and you are entitled to a refund of any VAT paid.

Final Word

In actuality, most sorts of expenses are rather straightforward when it comes to VAT. The majority of expenses recur on a regular basis. So you just need to think about the principles once, and the next month when the identical expense arises, you’ll know exactly how to handle it.

Where things go off the rails, or where there is a mix of private and commercial use, things get a little more complicated. This is where you should think about your strategy, and, if you don’t have one, consider hiring an accountant to do the financial thinking for.

VAT on business expenses is just one of the many areas why having a firm like Pearl Lemon Accountants makes so much sense. To learn more about just how we can help your unique business, contact us today.

FAQs

Do you pay VAT on business expenses?

Yes. VAT is charged on all expenses, even if the specific item is exempt.

Can you claim VAT on business expenses?

Yes, you can! But you can only claim it on the products or services used solely for the company, and the organisation has to be registered for VAT. Still unsure if your goods qualify? Let’s chat!

What business expenses are VAT deductible?

Business expenses that are VAT deductible include vehicles, fuel costs, travel expenses, and assets acquired for the business with a value of £50,000 or more. 

Are business expenses exempt from VAT?

No, they are not. Even if the specific item is exempt, VAT will still be charged. 

How much VAT can a business claim back?

Up to 20% of the VAT on the company’s utility bills can be reclaimed if your work-from-home office takes up 20% of the floor space. However, you have to have valid VAT invoices and keep records supporting and proving that the claim you’re trying to make is valid. 

How far can you backdate VAT?

You can backdate VAT as far as 6 months for services and 4 years for products. You can reclaim VAT on products and services as long as they are related to the company.

Do I need to register my business for VAT?

No, you do not. The only businesses that need to register for VAT are those that sell any products or services that happen to be “out of scope” or specifically exempt from VAT. Need more clarification? Let’s chat!