What VAT you can reclaim on business expenses

Understanding VAT and Reclaiming It

Value Added Tax (VAT) is a consumption tax applied to most goods and services in the UK. As a VAT-registered business, you generally charge VAT on your sales (output VAT) and pay VAT on your purchases (input VAT). The core principle of reclaiming VAT is that you can recover the input VAT paid on goods and services that your business uses to make taxable supplies.

To be eligible to reclaim VAT, your business must be registered for VAT with HMRC. The current VAT registration threshold is £90,000 of taxable turnover in any rolling 12-month period (figures for illustration — check current rates).

General Rules for Reclaiming VAT

When reclaiming VAT, there are fundamental rules you must follow:

• Valid VAT Invoice: You must hold a valid VAT invoice for the purchase. This invoice should clearly show the VAT amount, the VAT rate, and the supplier's VAT number.
• Business Purpose: The goods or services must be for your business purposes and relate to your taxable supplies. You cannot reclaim VAT on items solely for personal use.
• Payment: You must have paid for the goods or services. If you reclaim VAT on items you haven't paid for, you may need to repay HMRC (this is known as 'clawback').

If an expense is used for both business and personal purposes, you can only reclaim the business proportion of the VAT. For example, if 50% of your mobile phone calls are for business, you can reclaim 50% of the VAT on the phone and service plan.

Common Business Expenses and VAT

Many everyday business expenses are eligible for VAT reclamation:

• Office Supplies and Equipment: This includes items like computers, printers, stationery, and furniture.
• Utilities: VAT on electricity and gas for your business premises is generally reclaimable. For most business energy supplies, the standard VAT rate of 20% applies. However, some low-usage business premises or those with residential use may qualify for the reduced rate of 5%.
• Professional Fees: Services from accountants, solicitors, or consultants typically incur standard rate VAT, which can be reclaimed.
• Travel and Accommodation: You can reclaim VAT on business travel expenses, including transport (flights, trains, taxis, rental cars), meals, and accommodation, provided they are for business trips and you have valid invoices.

Specific Rules for Certain Expenses

• Cars: Reclaiming VAT on buying a car is generally restricted unless the car is used exclusively for business and not available for private use (e.g., for a taxi firm or driving school). For leased cars, you can normally only reclaim 50% of the VAT charged, to account for private use. However, VAT on commercial vehicles like vans or trucks used exclusively for business can usually be fully reclaimed.
• Fuel: If a vehicle is used solely for business, you can reclaim all the VAT on fuel. If a vehicle is used for both business and personal journeys, you have options:
• Fuel Scale Charge: Reclaim all VAT on fuel, then apply a fixed fuel scale charge (set by HMRC based on CO2 emissions) to account for private use.
• Business Mileage Only: Reclaim VAT only on the proportion of fuel used for business purposes, requiring accurate mileage records.
• Employee's Own Car: If employees use their own cars for business and claim mileage, you can reclaim VAT on the fuel element of those payments, but you must keep fuel receipts and use HMRC's advisory fuel rates.
• Business Entertainment: Generally, you cannot reclaim VAT on entertaining clients, suppliers, or customers. This includes meals, drinks, or event tickets provided for hospitality. An exception may apply for entertaining overseas clients, provided the entertainment is reasonable and strictly business-related. VAT on staff entertainment (e.g., annual parties, team-building) may be reclaimable if it benefits all employees and serves a business purpose.

What VAT Rates Apply?

Understanding the different VAT rates is crucial for correct accounting:

• Standard Rate (20%): This applies to the majority of goods and services in the UK. If a supply isn't specifically listed as reduced, zero-rated, or exempt, it's standard-rated by default.
• Reduced Rate (5%): This applies to a limited list of goods and services, such as domestic gas and electricity, children's car seats, and sanitary products.
• Temporary Reduced Rate: From 25 June 2026 to 1 September 2026, a temporary reduced rate of 5% will apply to certain children's meals and family admission tickets to attractions, replacing the standard 20% rate for these specific supplies.
• Zero Rate (0%): Zero-rated supplies are still taxable, but the VAT rate is 0%. This means you don't charge VAT to your customers, but you can still reclaim input VAT on costs related to making these supplies. Common zero-rated items include most food and non-alcoholic drinks (with exceptions like hot takeaways and confectionery), children's clothing and footwear, books, newspapers, and public transport.
• Exempt Supplies: These are entirely outside the scope of VAT. You do not charge VAT on exempt supplies and, crucially, you cannot reclaim any input VAT on costs related to making them. Examples include financial services, insurance, education, and health services from registered practitioners.

Common mistakes

• No Valid VAT Invoice: Reclaiming VAT without a proper VAT invoice is a common error and can lead to HMRC disallowing your claim.
• Reclaiming VAT on Exempt Items: Confusing zero-rated with exempt items. You cannot reclaim VAT on purchases used to make exempt supplies.
• Reclaiming VAT on Non-Business Expenses: Attempting to reclaim VAT on goods or services used purely for personal reasons.
• Incorrect Apportionment: Failing to correctly split VAT on expenses used for both business and personal purposes, such as fuel or home office utilities.
• Client Entertainment: Reclaiming VAT on client entertainment, which is generally not allowed.