Reclaiming VAT on business purchases in the UK.

What reclaiming VAT actually means

When you buy something for your business, the price often includes VAT. That VAT is called input tax. When you sell, you add VAT to your prices. That is called output tax.

On each VAT return you show both figures. HMRC describes the return as telling it how much VAT you have charged and how much you have paid to other businesses. You pay the difference to HMRC, or HMRC pays you if you paid out more than you charged.

So "reclaiming VAT" is not a separate form or claim. It is the purchases side of your normal VAT return.

Who can reclaim VAT

Only VAT-registered businesses can reclaim VAT. You must register once your taxable turnover for the last 12 months goes over £90,000, which is the VAT threshold. You can also choose to register below that figure. This is called voluntary registration.

You can reclaim VAT on purchases from your effective date of registration. HMRC confirms that date when you register. There are also rules for costs from before that date, covered further down.

What you can reclaim VAT on

The general rule is simple. You can reclaim VAT on items you buy for use in your business. Typical examples include:

• Stock and materials you buy to sell or to use in your work
• Equipment such as computers, tools and machinery
• Software subscriptions, phone contracts and professional services
• Rent, utilities and repairs for business premises, where VAT is charged
• Advertising, printing and postage costs that carry VAT

The VAT has to have been charged to you in the first place. Many small suppliers are not VAT registered, so their invoices have no VAT to reclaim. Some items are zero-rated or exempt, so again there is nothing to claim. If your own sales are exempt, as care from a regulated provider can be, that also limits what you can reclaim. See bookkeeping for care providers.

What you cannot reclaim VAT on

HMRC lists several costs where VAT is blocked, even if you are registered. You cannot reclaim VAT on:

• Personal items. Anything that is only for personal use.
• Business entertainment. Entertaining or hospitality for people you do business with, such as theatre or sports tickets.
• Costs of exempt sales. Goods and services your business uses to make VAT-exempt supplies.
• Margin scheme goods. Goods sold to you under one of the second-hand margin schemes.
• Going concern transfers. Business assets transferred to you as a going concern.

Entertainment is the one that catches people most often. A meal with a client goes in the books as a business cost, but the VAT on it stays unclaimed.

Purchases used partly for personal reasons

Some costs are shared between the business and private life. In that case you can only reclaim the business share of the VAT.

HMRC gives two examples. If half your mobile phone calls are personal, you reclaim 50% of the VAT on the phone and the plan. If your home office takes up 20% of the floor space, you reclaim 20% of the VAT on your utility bills.

You must keep records that show how you worked out the business share. A short note of your method, kept with the accounts, is far better than a guess made at return time.

A worked example

Cars, fuel and mileage

Vehicles have their own rules. You might be able to reclaim all the VAT on a new car or commercial vehicle if you use it only for business. HMRC counts travel between home and work as personal use, unless it is a temporary place of work.

If you buy a used car for the business, the sales invoice must show VAT, or there is nothing to reclaim. If you hire a car for business use only, you can reclaim all the VAT when the hire is no more than 10 days.

For fuel, you can reclaim all the VAT if the vehicle is only used for business. If it is also used privately, you have two choices:

• Reclaim all the fuel VAT and pay the fuel scale charge for that vehicle
• Reclaim only the VAT on business trips, backed by detailed mileage records

You can also decide not to reclaim fuel VAT at all. But if you make that choice for one vehicle, you cannot reclaim VAT on fuel for any vehicle the business uses. For fleets running on fuel cards, see bookkeeping for haulage and transport.

The paperwork you need

To reclaim VAT you need a valid VAT invoice from a VAT-registered supplier. HMRC says you cannot reclaim VAT using an invalid invoice, a pro-forma invoice, a statement or a delivery note.

A full VAT invoice shows, among other things, a unique invoice number, the supplier's name, address and VAT number, the time of supply, your name and address, a description of what was bought, the VAT rate and the total VAT.

For supplies of £250 or less including VAT, a supplier can give a simplified invoice instead. It still has to show the supplier's name, address and VAT number, the time of supply, what was supplied, the VAT rate and the total including VAT.

You must keep VAT records for at least 6 years. If you cannot get a valid invoice, ask the supplier for one first. Failing that, HMRC can choose to accept other evidence that the supply really happened, but it does not have to.

Costs from before you registered

You may be able to reclaim VAT on purchases made before your registration date. The time limits are:

• Goods: bought within 4 years before registration, if you still have them or they were used to make goods you still have
• Services: bought within 6 months before registration

The purchases must be for the same business that is now registered, and must relate to the VAT-taxable goods or services it supplies. You still need valid VAT invoices for them.

When and how the money comes back

You usually send a VAT return every 3 months. The deadline for filing and paying is normally one calendar month and 7 days after the end of the period.

If the VAT you paid on purchases is more than the VAT you charged, HMRC usually repays the difference. Most repayments are processed automatically and are usually made within 30 days of HMRC receiving the return. They go to your bank account if HMRC has your details.

Two more points matter here. If you reclaim VAT on something you then do not pay for, you must repay that VAT to HMRC. And if you did not have the invoice in time, you claim the VAT on the return for the period when you receive it.

Fixing a missed or wrong claim

You can correct errors in returns for the previous 4 years. A net error of £10,000 or less can usually go on your next return. So can an error up to £50,000 if it is less than 1% of your total sales. Larger errors, and any deliberate ones, must be reported to HMRC separately.

Common mistakes to avoid

• Claiming VAT from a card receipt or statement instead of a proper VAT invoice
• Claiming VAT on client meals and event tickets
• Claiming 100% on phones, broadband or vehicles that are partly personal
• Claiming VAT on invoices from suppliers who are not VAT registered
• Losing invoices, then having nothing to show if HMRC asks
• Forgetting VAT on costs from before registration

Most of these come down to the same thing: purchases being recorded long after they happened, when nobody remembers what they were for.

Why up-to-date books make VAT easier

A VAT return is only as good as the records behind it. If every purchase is matched to an invoice as it comes in, with the right VAT treatment, the quarter-end return becomes a check rather than a hunt for paperwork.

That is what daily bookkeeping does. Each bank line is matched to an invoice or receipt, missing paperwork is chased while it is still easy to find, and blocked costs like entertainment are coded correctly from the start.