What is VAT?
VAT is a tax added to most goods and services sold by VAT registered businesses. It is technically a tax on consumers rather than businesses, and as such it is referred to as an indirect tax. A business must charge VAT on all goods or services that it sells if the business is VAT registered. How much VAT must be charged depends on whether the good or service being sold is taxed at the standard rate, reduced rate, zero rate, or is VAT exempt.
As of 6 April 2024, the standard VAT rate is 20%. The reduced VAT rate of 5% is applied to certain goods and services such as some health products, fuel, heating, and car seats for children. Other goods and services have a zero rate of VAT, including children’s food, clothes, and books, and certain equipment for those with disabilities. Finally, some goods or services are exempt from VAT. Examples include some sporting activities, betting and gambling, bingo, lottery ticket sales, admission charges to certain cultural events, and antiques, works of art, or similar, under certain conditions.
Who must register for VAT?
Not all businesses need to register for and charge VAT. Businesses must register for VAT if their VAT taxable turnover exceeds £90,000 during the previous 12-month period or if it is likely that their turnover will exceed this threshold in the next 30 days. They may also need to register in certain other situations. Businesses that do not meet the threshold can still voluntarily register.
For more information, read VAT.
What types of purchases can VAT be reclaimed on?
The full amount of VAT a business has paid when purchasing goods or services can be reclaimed in respect of any valid business purchases (ie where the goods or services purchased are used purely for business purposes). In order to reclaim VAT, the business reclaiming VAT (ie the purchaser) must be VAT registered, as must the business that sold them the goods or services. They must also have supplied VAT invoices.
Business purchases that are also for personal use (eg a mobile phone contract which is used to make both business and personal calls) are only VAT deductible for the proportion of business use (eg if only 50% of calls are made for business purposes, only 50% of the VAT charged on the contract cost can be reclaimed).
Can I reclaim VAT on purchases made before my business registered for VAT?
VAT paid on goods or services purchased by a business prior to its VAT registration may be reclaimed, as long as the purchases were made within certain time limits.
Can I reclaim VAT when I sell goods that are exempt from VAT?
If you only sell goods and services that are exempt from VAT, you don’t need to register for VAT so won’t be eligible to reclaim VAT.
If you sell both exempt and taxable goods and services, your business is ‘partly exempt’ and you should be able to reclaim VAT on some purchases. If you’re partly exempt, you should keep separate records and calculations regarding your purchases and their applicable VAT. For more information, read the government’s guidance on partial exemption.
What can VAT not be reclaimed?
VAT cannot be reclaimed on any goods or services that are solely for personal or private use (ie those which are not used for business purposes at all) This is irrespective of whether the purchase was made by a business and/or using a business credit card or similar. VAT also cannot be reclaimed in respect of:
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goods or services that are VAT exempt (eg insurance, postage stamps, health services provided by doctors, etc)
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entertainment or hospitality costs, even if these are purely for business (eg the costs of entertaining potential customers or partners)
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purchases made under one of the VAT second-hand margin schemes
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any business assets transferred as a going concern (eg a functioning, solvent business)
Can I reclaim VAT on expensive business assets (eg capital items)?
Special rules apply in respect of reclaiming VAT on certain expensive items. For applicable items, VAT claims should be spread across multiple years and the amounts claimable may change depending on the nature of the sales the business makes during these years. Applicable items are:
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individual computers or single pieces of computer equipment, aircraft, ships, or boats that cost at least £50,000 before VAT, and
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land and buildings that cost at least £250,000 before VAT
For more information, read the government’s guidance on the Capital Goods Scheme for VAT.
Can VAT be reclaimed on car and petrol costs?
The full amount of VAT paid can be reclaimed on new cars or other commercial vehicles that are used solely for business purposes. This excludes use for commuting, (ie travelling between home and business), but travelling to or from a temporary place of work can still be considered a business purpose. Used cars must come with a sales invoice that shows details of any VAT charged, in order to be VAT deductible.
For cars that are leased for business use while a regularly used business vehicle is off road, 50% of the VAT charged for the hire can usually be reclaimed.
VAT can generally be reclaimed on business-related vehicle maintenance or running costs (including off-street parking costs), even if the vehicle itself is not VAT deductible. There are also various methods of reclaiming VAT for fuel - see the government's guidance for more information.
Can VAT be reclaimed on employee travel costs?
VAT can typically be reclaimed in respect of travel expenses, including meal and accommodation costs, incurred by employees who are on business trips.
