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Most VAT registered businesses are entitled to reclaim the VAT they incur on goods and services used by the business. This is known as input VAT.
Some of the common areas where VAT cannot be reclaimed include the following:
- Goods and services used to make exempt supplies. VAT doesn’t apply to everything and there are certain supplies which are specifically not subject to VAT. These are referred to as ‘exempt’ supplies. This includes insurance, financial services, postal services, health and education, although there are exceptions in every category.
- Goods and services used to make taxable and exempt supplies. A business that incurs expenditure on taxable and exempt business activities is partially exempt for VAT purposes. In essence, the business has to make an apportionment between the activities using a ‘partial exemption method’ in order to calculate how much input tax is recoverable.
- Goods and services for private use. No VAT is recoverable on any expenditure that is purely for private use. When expenditure has a mixed business and private/non-business purpose the related VAT should generally be apportioned and only the business element claimed.
- Generally speaking, it is not possible to reclaim the VAT when you buy a car. There are exceptions, but you need to be able to argue that the car is to be used 100% for business purposes: a taxi or adapted driving school car for example.
- Business entertainment expenditure. Generally, VAT cannot be recovered on business entertainment. This includes the gratuitous provision to customers or clients of hotel accommodation, food and drink or tickets to events. Staff entertaining such as staff parties, team building exercises, staff outings and similar events do usually qualify for input VAT recovery.
- VAT on goods or services from outside the UK. The exact rules of what VAT is refundable depends on the other countries rules for claiming input tax and whether the supplier is EU or non-EU based. It is important to note that VAT incurred in foreign countries can never by reclaimed on a domestic UK VAT return.
The above is only a short summary of some of the areas where input VAT may not be recoverable. If you are uncertain if the VAT on a particular purchase can be reclaimed, or you have any other questions or concerns, please do not hesitate to contact us.