One of the most commonly asked questions from our clients is ”how can I pay less VAT?”. Well, we can’t necessarily reduce the amount of output VAT paid (you have to charge VAT when it’s within the law), but we can optimise the amount of input VAT recovered.
As well as claiming back as much input VAT as possible under the VAT laws, we must also consider where VAT cannot be recovered (because it is ‘blocked’) and make the proper VAT accounting arrangements for that VAT. For during VAT audits one of the areas frequently targeted by HMRC is input VAT that has been recovered incorrectly via a business’ VAT return. Most businesses involved in the making of VAT exempt supplies will be well aware that VAT on costs incurred in the making of those exempt supplies cannot be recovered. However irrecoverable VAT costs can also be an issue for fully taxable businesses.
There are particular types of costs on which VAT cannot be reclaimed regardless of whether a business sells VAT exempt or Standard-rated goods and services. In addition there are circumstances in which unnecessary irrecoverable VAT costs can arise simply because the conditions required to avoid a VAT charge were not complied with.
5 common problem areas that affect all businesses are as follows:
1: Business Entertainment
VAT incurred on business entertainment costs for UK customers and contacts cannot be recovered. Business entertainment includes hospitality of any kind (e.g. food and drink, accommodation, tickets to the theatre, concerts, sporting events etc.).
It is worth noting though that VAT can be claimed on staff entertainment, as well as business entertainment provided to overseas customers that is of a reasonable kind and on a reasonable scale.
You can see therefore that it is essential to retain sufficient supporting information on the type of entertainment provided in order to avoid unnecessary investigations by HMRC further down the line.
2: Car Costs
The VAT rules for expenditure incurred on cars are particularly complex. In general VAT cannot be recovered on the purchase of a car, though there are some exceptions such as the purchase of taxis, driving instruction cars and self-drive hire cars provided they are not made available for private use.
If a business leases cars for business purposes though, then 50% of the VAT charged can be recovered.
There are also complicated rules for other motoring expenses such as fuel costs, repair costs, private use charges etc. This is an area where it is easy to make VAT errors so seeking advice could be well worthwhile.
3: Non-business Costs
VAT can only be recovered on costs incurred for business purposes. Sometimes a business may agree to pay non-business costs, e.g. expenditure related to domestic accommodation, expenditure for the benefit of company directors or proprietors such as personalised number plates, sporting activities etc. It is important to ensure VAT is not reclaimed on these types of costs.
4: Third-party Costs
There are occasions when a business may agree to pay someone else’s costs, such as the payment of legal costs awarded against the losing party following litigation, payment of a landlord’s costs by a tenant, repair costs for damage to a third party’s property.
In these scenarios the supply was not made to the business paying the bills so they are not entitled to recover the VAT charged.
5: VAT incurred on Acquisitions
A UK VAT registered business should not be charged foreign VAT by a supplier on the acquisition of goods from another EU country. However this is dependent on the supplier obtaining the UK business’ VAT number and showing it on their invoice. If this does not happen then the supplier is required to charge VAT.
In order to avoid suffering irrecoverable VAT on overseas costs unnecessarily it is important to ensure such purchases are identified and the VAT number is provided to the supplier when ordering the goods.
These are just a selection of situations where it is easy to fall into VAT traps. VAT registered businesses need to be alert to potential problem areas and ensure reviews of their VAT processes are undertaken on a regular basis.
Do you know enough about irrecoverable VAT? Is your accounts payable team up to date with their VAT knowledge on what input VAT can and cannot be reclaimed? To test VAT knowledge, you can use our free online 'VAT Knowledge Assessment' tool. We will provide you with a free, no obligation feedback report that will highlight VAT knowledge gaps and suggest improvements.