VAT which is not deductible
A VAT registered business can usually recover VAT on the purchase of goods and services relating to their VATable business activities. However there are some situations where a business incurs VAT which is not deductible.
As a golden rule, it is the amount of VAT that should have been charged that is claimed - not the amount actually charged. This rule applies even if the VAT charged on an invoice is higher. For example if you are charged 20% VAT when it should have been 5% VAT, then your claim is limited to 5% VAT. In addition there are certain situations where VAT is not deductible.
We'll now cover the most common situations where VAT is not deductible.
Whilst recovery of VAT on business entertaining is specifically disallowed it is possible to recover VAT on the cost of staff entertaining. Though only provided it benefits your staff - for example to improve staff morale. Where there is a combination of staff and non-staff attending, then it will be necessary to restrict the VAT recoverable. You can read more about this here.
However, there is a method of avoiding this restriction which could potentially produce large VAT savings.
By charging your guests a nominal sum this is no longer 'free' hospitality so the VAT restriction is not relevant. The charge could actually be less than the cost of the food and drink provided to the guests. We've set out an example below so you can see how this might work in practice.
Your Christmas party costs £100 per head plus £20 VAT. You have 25 important clients attending. By default, the £500 VAT on their costs would be VAT which is not deductible.
You charge your clients £12 each. You'll need to account for the VAT of £2 each on this, however you can reclaim the £500. This is an overall saving of £450.
Any VAT suffered on the purchase of a car that has private use is not recoverable. However VAT on cars with 100% business use such as stock in trade for car dealerships, taxis, driving schools, hire cars and pool cars can be claimed. This point was covered in more detail in one of our earlier posts.
If you are a residential building contractor you are able to recover VAT on the purchase of building materials. However the VAT which is paid on furnishings, white goods etc cannot be claimed. We'll revisit this topic in more detail at a later date.
Finally, along with being aware of the VAT which is not deductible, it's important to remember to obtain a valid VAT invoice to support any claim made.
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].