Reclaiming VAT on business expenses: what you can claim

Reclaiming input VAT is the other half of being VAT-registered. Done well, it reduces your VAT bill on every return. Done badly, it is one of the most common causes of HMRC assessments, because some costs look like business expenses but carry VAT that cannot be recovered.

The basic conditions

You can reclaim VAT on a purchase if:

• you are VAT-registered (or the cost falls within the pre-registration rules below)
• the purchase is for your business and used, or intended to be used, to make taxable supplies
• VAT was charged correctly by a VAT-registered supplier
• you hold the evidence, normally a valid VAT invoice or, for imports, the import VAT certificate or postponed import VAT statement

You reclaim the VAT in box 4 of the VAT return for the period in which you received the invoice, or, if you use the Cash Accounting Scheme, the period in which you paid it. If you miss it, you have four years to claim.

Valid VAT invoices

A full VAT invoice shows the supplier’s name, address and VAT number, an invoice number and date, the time of supply if different, your name and address, a description of the goods or services, and for each rate the net amount, the rate and the VAT.

For purchases of £250 or less including VAT, suppliers can issue a simplified invoice, such as a till receipt showing the supplier’s name, address and VAT number, the date, a description, the total and the VAT rate. Card receipts without a VAT number are not enough.

What you cannot reclaim

Business entertainment

VAT on entertaining customers, suppliers and other non-employees, such as meals, drinks, tickets and hospitality, is blocked. There is a narrow exception for reasonable entertainment of overseas customers.

Entertainment for employees is different. VAT on a staff party or team event is recoverable, because it is for business purposes. If employees and clients attend together, apportion the VAT between the two.

Cars

VAT on buying a car is blocked unless the car is used exclusively for business and not available for private use, which in practice means pool cars kept at the business premises, taxis, driving school cars and self-drive hire cars. A director’s company car is almost never eligible.

Leasing a car is treated differently: you can reclaim 50% of the VAT on the lease rental if there is any private use, and 100% if the car is used only for business. VAT on repairs and maintenance of a business car is normally recoverable in full.

Vans, lorries and other commercial vehicles are not cars, so VAT on buying them can usually be reclaimed in full.

Private and non-business use

You cannot reclaim VAT on goods or services bought for private use, or used for non-business activities. If a cost has both business and private use, such as a sole trader’s mobile phone or home broadband, reclaim only the business proportion and keep a note of how you worked it out.

Other blocked items

• goods bought under a margin scheme, where no VAT is shown on the invoice
• certain fixtures fitted by house builders in new homes, such as most domestic appliances
• costs relating to exempt supplies, unless you are within the partial exemption de minimis limits

Fuel and mileage

There are three ways to deal with VAT on road fuel used in cars:

1. Reclaim all the fuel VAT and account for the private use by adding the fuel scale charge to your output VAT. The charge depends on the car’s CO2 emissions and is updated each year from 1 May.
2. Reclaim only the business share, using detailed mileage records to split business and private miles.
3. Reclaim no VAT on fuel, including fuel for business journeys. This can be simplest where business mileage is low.

If you reimburse employees for business mileage in their own cars, you can reclaim VAT on the fuel element of the mileage allowance, using HMRC’s advisory fuel rates, provided you keep VAT receipts from the employee covering the fuel bought.

Common costs and how they are treated

Costs before you registered

When you register, you can reclaim VAT on:

• goods bought up to four years before your registration date, if you still hold them, or they were used to make other goods you still hold, and they are for your business
• services bought up to six months before registration, for your business

You claim these on your first VAT return. Keep the invoices and a list of the goods with dates and values. This is one reason businesses with high start-up costs consider voluntary registration.

If you use the Flat Rate Scheme

On the Flat Rate Scheme you cannot reclaim VAT on purchases, apart from single capital assets costing more than £2,000 including VAT.

Frequently asked questions

Can I reclaim VAT on client entertainment?

No. VAT on entertaining customers, suppliers and other non-employees is blocked, except for reasonable entertainment of overseas customers.

Can I reclaim VAT on a company car?

Not on the purchase, unless the car is used exclusively for business and not available for private use. You can usually reclaim 50% of the VAT on lease rentals and all the VAT on repairs.

Can I reclaim VAT without a VAT invoice?

Generally no. You need a valid VAT invoice, or a simplified invoice for purchases of £250 or less. HMRC can accept other evidence in limited circumstances, but you should not rely on it.

How far back can I reclaim VAT?

Four years for missed input tax while registered. On registration, four years for goods you still hold and six months for services.

Can I reclaim VAT on my home office costs?

If you are a sole trader you can reclaim the business proportion of VAT on household costs such as electricity and broadband, if the bills include VAT. Domestic fuel carries 5% VAT. Keep a record of how you calculated the business share.