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If your business is registered for Value-added tax (VAT), you must charge VAT on all your goods and services and then pay this amount to HM Revenue & Customs (HMRC).
However, being VAT registered also means you can reclaim VAT on all goods and services your business buys, making them cheaper than if you weren’t VAT registered.
Understanding the process for reclaiming VAT is important as it’s not always straightforward. This guide takes you through the steps.
Who can claim back VAT?
You can only claim back VAT if you are a VAT-registered business. Your business must be registered for VAT if your VAT taxable revenue has exceeded £85,000 over the past 12 months. Your VAT taxable revenue is the total value of everything you sell that is not exempt from VAT.
What can you reclaim VAT on?
You can only reclaim VAT on goods and services that were exclusively used for your business. You can’t reclaim VAT on goods and services that are for non-business use or are for client entertaining. You also can’t claim for services that are exempt from VAT, such as insurance.
To give you a clearer idea of what you can reclaim VAT on, take a look at the following:
Claiming back VAT on previous business costs
You can use your first VAT return to claim back VAT costs that your business incurred before you registered for VAT. However, there are certain rules that you’ll need to follow to do this.
For example, you can claim for goods you still use, such as laptops or equipment, if you bought them up to four years before you registered. You can also claim for services such as accounting that you bought up to six months before you registered for VAT.
Personal use and claiming back VAT
If you use certain items for both personal and business purposes, you can claim back a portion of VAT on these items. For example, if you run your business from home, you can claim back the business proportion of services such as your utility bills and broadband.
Let’s say, for instance, that half your mobile phone calls are personal and half are for business use. You can reclaim 50% of the VAT on the purchase price and the service plan. Similarly, if your office occupies 10% of the floor space in your home, you can reclaim 10% of the VAT on your utility bills.
It’s important that you keep records to support your claim and show how you calculated the business proportion. You’ll also need valid VAT invoices.
Claiming back VAT on travel and food
You can reclaim VAT on employee travel expenses for business trips, for example if they were visiting a client. Travel expenses include transport, hot food and accommodation that you pay for. Just be aware that most public transport is zero rated for VAT, so there will be no VAT to reclaim.
Claiming VAT back on vehicles
You might be able to reclaim all the VAT on a new car or commercial vehicle so long as you only use it for business. You’ll need to be able to prove that it’s not used for personal reasons, for example if it’s specified in your employee’s contract. Note that personal use includes travelling between your place of work and your home.
You might also be able to reclaim all the VAT on a new car if it’s mainly used as a taxi, for driving lessons, or for self-drive hire.
If you buy a used car for business purposes, the sales invoice must show the VAT.
Businesses that hire a car to replace a company car that’s off the road can often claim half of the VAT on the hire charge. However, if you hire a car for less than 10 days, you can reclaim all the VAT as long as it’s only used for business purposes.
Claiming VAT back on fuel
You can reclaim 100% of the VAT on fuel if you are only using the vehicle for business. If you are using the vehicle for both business and personal reasons, you can either:
- Reclaim all the VAT and pay a fuel scale charge that is specific to your type of vehicle. You can use the tool on the gov.uk website to work this out.
- Only reclaim the VAT on fuel you used for business trips. But you’ll need to keep accurate mileage records for this which can be complicated.
You could also choose not to reclaim any VAT at all. This can be a good option if your business mileage is so low that you’d pay more for the fuel scale charge than you’d be able to reclaim in VAT.
The process for reclaiming VAT as a business
To reclaim VAT as a business, you need to submit a VAT return to HMRC every three months. This will show how much VAT you’ve charged to customers and how much you’ve paid.
All VAT registered businesses should now be signed up for Making Tax Digital for VAT, which means all VAT returns need to be summited through MTD compatible software.
How can an accountant help me reclaim VAT?
An accountant can help ensure you don’t make any mistakes on your VAT return. Your accountant will be able to calculate the correct VAT split on goods and services if you work from home, for instance. They can also help you to prove that goods and services are for business use only.
Hiring an accountant to help with your VAT return can offer important peace of mind and make sure you’re reclaiming everything you can.
Keeping VAT records
It’s crucial for any business to keep accurate records when reclaiming VAT. Making Tax Digital means that these records should now be kept digitally.
You will need to be able to show the amount you’ve paid through either VAT invoices or retail receipts. Retail receipts don’t always include VAT but you can still use them if the purchase cost less than £250.
You might also be able to claim VAT even if you don’t have receipts. You’ll need proof of purchase, such as a bank statement, and any other supporting documentation. You must also be able to show that the purchase was exclusively used for your business.
How to calculate how much VAT to claim back
To calculate how much VAT to reclaim you need to work out the difference between the amount of VAT your business has charged on sales (output VAT) and the amount you’ve paid on business-related purchases (input VAT).
Then deduct your input VAT figure from your output VAT figure. It it’s negative, that’s the amount you need to reclaim. However, if it’s positive, you will need to pay that amount to HMRC.
For example, if your output VAT was £10,000 and your input VAT was £5,000:
- £10,000 – £5,000 = £5,000 so you must pay £5,000 to HMRC
But if your output VAT is £5,000 and your input VAT is £10,000:
- £5,000 – £10,000 = -£5,000 so you can claim back £5,000 from HMRC.
How to receive a VAT refund payment
VAT repayments are usually made within 30 days of HMRC receiving your VAT return. Your repayment will go directly into your bank account if HMRC has your bank details. If not, you’ll be sent a cheque.
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