Reclaiming VAT - How to Claim Tax Back
In our helpful VAT reclaim guide we'll help you answer the following frequently asked questions:
- What is VAT in the UK?
- How VAT works?
- What are the current VAT rates?
- When does my business have to be registered for VAT?
- I want to reclaim input VAT
- When can't I reclaim VAT?
When we first meet new clients, one of the key areas for discussion is often VAT. The tax can seem complicated, not helped by the fact that HM Revenue & Customs' rules and regulations change on a regular basis with successive government budgets.
However the basic principles have remained the same for many years and they're really quite straightforward. Here we'd like to give an overview on VAT, how it works, and how much your business is able to reclaim.
We understand that the process of reclaiming VAT on purchases is a big task to do yourself, so take a look at the questions we're most often asked about reclaiming VAT to find out more..
What is VAT in the UK?
Value Added Tax is a tax charged on the sale of goods and services purchased in the UK. It is collected by VAT-registered companies on behalf of HMRC. If your company is VAT registered, you are effectively collecting the tax from your customers and passing it on to HMRC with your VAT return. This is known as output VAT.
However, as a business you will also be charged VAT on the goods and/or services purchased from your suppliers. This is input VAT, and can be recovered from HMRC, either as a deduction from the output figure, or as an actual repayment.
How VAT works
Output VAT – Input VAT = Amount payable/repayable
- Output VAT is the VAT on the sale of taxable goods and services.
- Input VAT is charged on purchases and other expenses
Input VAT is deducted from output VAT and the difference is the amounts due to or from HM Revenue and Customs (HMRC).
What are the current VAT rates?
The figures for 2019/2020 are:
- 20% Standard rate – this applies for most goods and services.
- 5% Reduced rate – for some goods and services such as children's car seats
- 0% Zero rate – Food and children's clothes are considered zero-rated goods
There are also some goods and services which are exempt from VAT, such as postage stamps, medical services and insurance.
When does my business have to be registered for VAT?
Businesses, including sole traders and contractors, must register for VAT once they have exceeded, or expect to exceed, a turnover of £85,000 per annum. Once this threshold has been reached, everything you sell, or the services you provide, are subject to VAT.
I want to reclaim input VAT. What's included?
Examples of the goods and services where VAT can be reclaimed include laptops, off-street car-parking, gifts for employees, car rentals and entertaining staff. If you work from home and use one room as an office, you can reclaim VAT on utility bills – but only for the relative floor space taken up by the office. So if this room represents 15% of the overall floor space, you can reclaim 15% of VAT on utility bills.
However, if there is any company equipment such as mobile phones used for private purposes the VAT recovered should be deducted to reflect the non-business element.
When can't I reclaim VAT?
Anything that's purely for private use is excluded. There are also a number of specific business expenses where VAT is not recoverable. The main exclusions are as follows:
- Entertaining business contacts or clients, including the provision of food and drink, accommodation or tickets to events.
- Purchase of cars (unless it can be proved they are 100% for business use).
- Goods and services your business uses to make VAT-exempt supplies.
- Directors' accommodation.
Can I reclaim VAT on purchases made before my business became VAT registered?
Yes, you can claim VAT on purchases made before your business became VAT registered. You can reclaim the VAT on goods you bought up to 4 years before registration and services up to six month prior to registration.
For these goods to qualify for a VAT reclaim, they must;
- Be still held by you
- Purchased by you as the entity that is registered for VAT
You won't be able to claim VAT back on goods under the following circumstances;
- Goods you have sold before VAT registered
- Goods used before you were VAT registered (electricity, petrol)
- Goods related to the supplies you make that are exempt from VAT
Don't forget . . .
In order for VAT to be reclaimed or deducted as input tax, your business must be VAT registered within certain time limits, and you must hold a valid invoice or documentation for the purchase concerned.
You may also be interested in the flat rate scheme, whereby you pay a reduced percentage of VAT based on your industry to HMRC but do not recover any input VAT. To join this scheme your VAT turnover cannot be over £150,000.
Need further guidance?
We complete and submit VAT returns for businesses large and small, and offer expert advice on the finer points of VAT. Please do get in touch with a member of our friendly team on 01892 559480 to discuss how we can help.
Editor's notes: This post was originally published in 2017 and has been updated to reflect the current tax year for accuracy and comprehensiveness.