Reclaim VAT on business purchases

VAT you are charged on business purchases is called input tax. If you are VAT-registered, you take it off the VAT you charge your customers (output tax) on your VAT return. If your input tax is greater than your output tax, HMRC pays you the difference.

What you can reclaim

You can reclaim input tax on goods and services you buy for your business and use to make taxable supplies: sales that are standard-rated, reduced-rated or zero-rated. That includes stock and materials, equipment, office costs and professional fees, business travel, and VAT you pay on imports. For travel, you can reclaim the VAT on transport, meals and accommodation you pay for when an employee makes a business trip, unless you pay a flat rate for expenses.

If something is used partly for private purposes, you can reclaim only the business share. If half your mobile phone calls are personal, you can reclaim half the VAT. If your home office takes up a fifth of your floor space, you can reclaim a fifth of the VAT on your utility bills. Keep a record of how you worked out the share.

What you cannot reclaim

You cannot reclaim VAT on:

• anything used only for private purposes
• goods and services you use to make VAT-exempt sales
• business entertainment
• cars, unless an exception applies
• goods sold to you under one of the VAT second-hand margin schemes
• business assets transferred to you as a going concern

You must still keep the invoices for these purchases, but leave their VAT out of your claim.

Entertainment and hospitality

Business entertainment means hospitality of any kind, such as food and drink, hotel accommodation and tickets for theatre or sport, that you provide free to people who are not your employees. VAT on it is blocked even when it has a real business purpose.

Entertaining your own staff is different. Staff parties and outings are not blocked, but an event for directors or partners only is, and if outside guests attend you can reclaim only the employees’ share.

Cars

You cannot normally reclaim VAT on buying a car. You can reclaim it in full only if you use the car exclusively for business and it is not available for private use, which includes travel between home and a permanent workplace, or if you buy it mainly to use as a taxi, for driving instruction or for self-drive hire, or to sell on as a motor dealer or manufacturer.

Most vans and lorries are not cars for VAT purposes, so the block does not apply to them, although you can reclaim only the business share if you also use one privately. A van with rear seats added can count as a car. VAT on running costs such as repairs and off-street parking is not blocked, even where the VAT on the car itself is.

If you use the Flat Rate Scheme

What you need to claim

You must hold a valid VAT invoice from the supplier when you claim, or HMRC can refuse the claim. For imports, you need the official import document, such as a C79 certificate or a postponed VAT accounting statement, rather than an invoice. A full VAT invoice shows:

Claim on the return for the period in which the supplier’s tax point falls, which is usually the date of supply shown on the invoice. If you do not hold the invoice then, claim on the return for the first period in which you do. If you use the Cash Accounting Scheme, you can claim only once you have paid for the supply.

If you reclaim VAT and have not paid your supplier within six months of the invoice date, or of the payment due date if later, you must repay the VAT to HMRC. Keep your VAT records, including purchase invoices, for at least six years.

Time limit and VAT paid before you registered

A claim you leave out is an error on the original return, so you correct it under the VAT error-correction rules, and the four-year limit still applies.

When you register, you can treat VAT on earlier purchases as input tax if it relates to the taxable business you are registering and you hold the invoices. VAT on goods you used up or sold before registering is lost, and you must keep a stock account of what you claim.

If you also make exempt sales

A business that makes both taxable and exempt supplies is partly exempt and can usually reclaim only part of its input tax. You reclaim in full the VAT on purchases used only for taxable sales and none of the VAT on purchases used only for exempt sales. You split the VAT on costs shared between the two using a partial exemption method, which you use provisionally on each return and finalise in an annual adjustment. HMRC can approve a special method if the standard method gives an unfair result.

Blocked VAT, such as VAT on business entertainment, does not count towards total input tax. The de minimis test does not apply to VAT you paid before you registered.

Claiming on your return