Claiming VAT on business expenses
As we've previously mentioned when to register for VAT, we're now going to discuss the principal rules for claiming VAT on business expenses.
If you're a VAT registered business you'll most likely charge your clients/customers VAT for your goods or services. You'll also suffer VAT on many of your expenses. It is equally important to understand the rules for claiming VAT on business expenses so you can be both tax efficient and remain compliant with HMRC.
When a VAT-registered business purchases goods or services, the VAT paid on these purchases is known as 'input tax'. In many cases, businesses can reclaim this input tax, provided certain conditions are met. This process is known as VAT recovery.
The ability to recover VAT on business expenses not only reduces the overall cost of your expenses it also enhances your cash flow efficiency. However, it's important to establish what is regarded as a recoverable VAT expense and ensure that all the necessary conditions are met.
Conditions for claiming VAT on business expenses
HMRC sets strict guidelines and criteria for VAT recovery, and it's imperative for businesses to adhere to these to avoid complications or denials of their VAT claims. Not all input VAT can be recovered and recovery is not automatic. Input VAT must be reclaimed as part of the VAT return.
In order to ensure a successful VAT claim on business expenditure, the principal conditions that need to be met are as follows:
What are valid business expenses?
Understanding what expenses qualify for VAT recovery is crucial for businesses. Not all expenses incurred by a business will be eligible for a VAT reclaim. Here are some key types of expenses that do not qualify as a general rule:
The importance of maintaining proper business records
To successfully reclaim VAT on business expenses, maintaining proper documentation is essential. Obtaining a valid VAT invoice is the starting point. This invoice should include specific details like the supplier's VAT number, the date of supply, a description of goods or services, and the VAT amount charged. HMRC set out the specific criteria required here.
Businesses are required to keep their VAT invoices and other VAT records for at least six years. These records should be readily accessible in case HMRC requests to see them, either for routine checks or audits.
With the advent of Making Tax Digital (MTD) for VAT, keeping digital records has become more important. Businesses must ensure that their digital records meet HMRC’s requirements and are capable of submitting VAT returns digitally.
Avoiding pitfalls and compliance issues in VAT recovery
Navigating the VAT recovery process can prove challenging. Awareness of common pitfalls and compliance issues is essential for you to successfully claim VAT on business expenses, whilst avoiding penalties. We set out below some common problem areas below:
By being vigilant about the rules, common pitfalls and compliance issues, you can avoid any issues arising in the VAT recovery process and ensure you reclaim the correct amount of VAT and remain compliant with HMRC regulations.
For more useful information, check out our Ebooks here.
And if you'd like to know how we can help you with all of this, or with anything else, feel free to give us a call on 01202 048696 or email us at [email protected].
Alternatively, please feel free to complete our Business Questionnaire here.