Deductible VAT : all you need to know

What is deductible VAT?

VAT, at a rate of either 20%, 5% or 0%, is applied to most goods and services in the UK. As consumers, we are used to this being included in the final price of the products we buy. Businesses, however, have to learn to address VAT in a different way.

All businesses in the UK with a turnover over a certain threshold must register for VAT. Once registered, they must add VAT onto the price of their goods and services and collect that VAT (also known as “input VAT”) from their clients. In theory, this amount is then paid to HMRC. However, VAT-registered companies can also claim back any VAT they have spent on eligible goods and services (also known as “output VAT”).

The reality is that it is only the difference between the VAT that a business collects from clients and the VAT they pay out to suppliers is what they actually either pay to the government or reclaim (deduct) from the government.

VAT is referred to as “deductible” when it can be reclaimed by a business.

When is VAT deductible?

VAT can be reclaimed on expenditure that is “wholly and exclusively” for business use. This includes the purchase of VAT-taxable things such as office supplies, mobile phones and monthly bills, computer equipment, travel expenses, fuel, overnight accommodation, parking, as well as food and drink when this expenditure is required as part of business activities.

The golden rule, as always, is that the expenditure has to be “wholly and exclusively” for business purposes. VAT cannot be deducted or reclaimed on personal vehicles, personal mobile phones or personal travel. The situation becomes more complex where, for example, company cars are provided but the employees also use them in their personal time, or when mobile phones are used for both work and personal use. To avoid any confusion, accurate records must be kept.

Special rules govern the VAT on things such as entertaining staff and clients and giving gifts to staff. Because most public transport is 0% VAT rated, there is no point in reclaiming it. 

It should be noted that VAT cannot be reclaimed on an employee’s standard commute from home to their regular place of work.

How to make a VAT claim

Making your first VAT claim can be daunting, but with a little bit of assistance from Mooncard, it can become much simpler. VAT is reclaimed by filing what is referred to as a “VAT return”. This is a regular report, which is usually filed four times a year.

The VAT return covers the three-month period prior to the date of the claim and includes all VAT collected from clients and all VAT spent on expenses over this period.

Usually, VAT returns are dealt with very promptly and any refund should be transferred within a matter of days of filing the claim.

As with any business procedure, meticulous records have to be kept in the event of an inspection by the tax authorities. Receipts for all expenses, bank statements indicating all transactions and accurate breakdowns of business and personal use must be recorded.

Conclusion

Keeping track of VAT-deductible expenses is complex but it doesn’t need to be a major headache. With Mooncard, you can keep track of all your employees’ expenses and easily work out how much VAT you can reclaim. Find out more today with a free demo.