Your clients might provide rewards and perks to their staff (and sometimes their family members too), often as an incentive to encourage hard work and improved performance. Can they reclaim the input tax on these costs, and how can they maximise their claim?
Purpose v benefit
There are many situations in which your clients can justifiably claim that an expense has a positive benefit to their business. But this is not the key issue as far as input tax claims are concerned. In order to be reclaimable, the underlying expense must be for the “purpose” of the business. This is a completely different test to an expense being incurred for the “benefit” of a business. The latter is not sufficient to enable a reclaim.
Example. Jane, a computer consultant, is a keen golfer and wants to claim input tax on her club membership because she meets a lot of potential clients there. She met one particular client who now earns her business £20,000 of annual sales. However, she cannot claim input tax on her playing fees because the purpose of the expense is that she enjoys playing golf, even though there are clear business benefits for her.
Pro advice. In purpose v benefit situations, it is important that you ask your client what their motives were when they decided to purchase the goods or services in question. In other words, were these motives purely relevant to their business or for other reasons?
Homeworking
Your clients might decide to give every employee a laptop so that they can also work at home, perhaps if they have problems getting into the office. Many businesses are encouraging working from home to save on office rental costs. If they do so and there is no business use, the VAT you pay to the supplier is not input tax and cannot be claimed. As a starting point, there must be some business use to permit a reclaim.
Pro advice. In the modern internet age, most employees use computers for some business purposes, even if it is to just send and receive emails from colleagues and managers. The computer does not need to be a tool of trade for the employee, such as an architect drawing computerised plans.
Business and private use
If your clients agree that employees can also use their computers for private as well as business purposes, then an input tax apportionment should be made at the time of purchase in order to reflect the expected split. There is no need to review this percentage in the future to see if the actual private use is different.
Alternatively, they can claim 100% input tax on the purchase of the machine and then declare output tax each VAT quarter based on the cost of the computer and the percentage of private use compared to business use. This method might be particularly relevant if they don’t know which employee will use the computer when it is purchased. Output tax adjustments need to be made for five years.
The method of input tax apportionment is not prescribed in law as long as it is fair and reasonable. HMRC also confirms that it should be “kept simple” per the Input Tax Manual at VIT40000.
Pro advice 1. Encourage your clients to make a note of the calculation process in case of a query on a compliance visit.
Pro advice 2. Your clients will need to make a further input tax adjustment if their business is partly exempt and the employee has some involvement in the exempt part of the business. In most cases, the employee will be involved in both parts of the business so the input tax will be residual input tax and partly claimed, usually based on the standard method according to the split of taxable and exempt income. For more information on partial exemption, see VAT Notice 706.
Employee rewards
HMRC accepts that rewards your clients give to their staff to motivate them and boost performance are legitimate business expenses. For example, rewards might be given to celebrate securing a profitable order or at the end of a project or contract. It is therefore acceptable to claim input tax on any goods or services purchased in these circumstances. However, this is not the end of the story.
Output tax
If your clients provide rewards of goods or services that are available to all staff in their business, then HMRC’s policy is to not expect output tax to be paid on the supply in question, with input tax being claimed on the purchase. But there could be a problem if they reward specific individuals.
Example. Acom Ltd has had a successful trading month, winning lots of commission from new orders, so the directors have agreed to take out all staff for a free meal and drinks at a local restaurant. John has been particularly successful, so he is given a crate of champagne worth £240 as a special reward just for him.
No output tax is payable on the food and drink and input tax can be fully claimed. Input tax can also be claimed on the cost of the champagne but output tax of £40 must be declared on the VAT return that includes the date when it is given to John, i.e. £240 x 1/6 = £40.
Pro advice 1. It is possible in situations such as the meal that the invoice from the restaurant will be made out to the individual director paying the bill with a personal debit or credit card. This is not a problem because the purpose of the expense is relevant to the business. As long as the business reimburses the director for the cost of the meal, then input tax can still be claimed.
Pro advice 2. The above Pro advice also applies to other costs, e.g. a hotel bill made out to the employee when they are away on a business-related trip.
Trips and team building
There is no also no problem claiming input tax if your clients arrange staff outings and similar events, team building exercises and staff parties. No output tax is payable, assuming the employees do not make any financial contribution to the event in question, e.g. via a payroll deduction. Any payment made by employees in this manner would be subject to output tax.
Pro advice 1. A common mistake made by clients is to claim input tax on costs relevant to spouses, friends and former employees, e.g. retired members of staff, who might be allowed to freely attend the event as well. In this situation, input tax is blocked on the non-staff costs under the rules of business entertainment.
Pro advice 2. A small charge to non-employees will mean that input tax can be claimed on the related cost, but output tax must be declared on the contribution made by the non-employee. For a token charge, e.g. £10 per person, the input tax claimed will usually be more than the output tax declared, so a positive VAT outcome is achieved.
Uniform or not?
Clothing for work is an expense category where VAT might often be overclaimed by your clients. Any clothes they freely provide to employees must relate to either a corporate uniform or protective clothing linked to their work duties in order to claim input tax.
It is not sufficient to provide normal day-to-day clothing on the basis that staff must look smart if they work in a shop or when meeting customers. For example, there would be no problem with claiming input tax on providing boiler suits or coveralls to staff for a car repair business, or safety clothing where it is required.
In its manual at VIT43800 (see Follow up ), HMRC refers to input tax being claimed on normal clothing bought for employees but then accounting for output tax when the clothes are given to the individual worker.
Pro advice. In this situation it’s probably best to not claim input tax in the first place. A key test to consider is whether the item in question could be used socially by the employee, e.g. for a night out at the local pub or visit to a theatre. If the answer is “yes” then it is probable that input tax cannot be claimed.
For the best VAT outcome, encourage your clients to ensure that staff rewards are made available to all staff. Advise them that input tax relevant to hospitality supplied to non-staff members, e.g. spouses and relatives, is blocked. However, this can be avoided by making a token charge for the event.
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.
Your clients might decide to give every employee a laptop so that they can also work at home, perhaps if they have problems getting into the office. Many businesses are encouraging working from home to save on office rental costs. If they do so and there is no business use, the VAT you pay to the supplier is not input tax and cannot be claimed. As a starting point, there must be some business use to permit a reclaim.
Pro advice. In the modern internet age, most employees use computers for some business purposes, even if it is to just send and receive emails from colleagues and managers. The computer does not need to be a tool of trade for the employee, such as an architect drawing computerised plans.
Business and private use
If your clients agree that employees can also use their computers for private as well as business purposes, then an input tax apportionment should be made at the time of purchase in order to reflect the expected split. There is no need to review this percentage in the future to see if the actual private use is different.
Alternatively, they can claim 100% input tax on the purchase of the machine and then declare output tax each VAT quarter based on the cost of the computer and the percentage of private use compared to business use. This method might be particularly relevant if they don’t know which employee will use the computer when it is purchased. Output tax adjustments need to be made for five years.
The method of input tax apportionment is not prescribed in law as long as it is fair and reasonable. HMRC also confirms that it should be “kept simple” per the Input Tax Manual at VIT40000.
Pro advice 1. Encourage your clients to make a note of the calculation process in case of a query on a compliance visit.
Pro advice 2. Your clients will need to make a further input tax adjustment if their business is partly exempt and the employee has some involvement in the exempt part of the business. In most cases, the employee will be involved in both parts of the business so the input tax will be residual input tax and partly claimed, usually based on the standard method according to the split of taxable and exempt income. For more information on partial exemption, see VAT Notice 706.
Employee rewards
HMRC accepts that rewards your clients give to their staff to motivate them and boost performance are legitimate business expenses. For example, rewards might be given to celebrate securing a profitable order or at the end of a project or contract. It is therefore acceptable to claim input tax on any goods or services purchased in these circumstances. However, this is not the end of the story.
Output tax
If your clients provide rewards of goods or services that are available to all staff in their business, then HMRC’s policy is to not expect output tax to be paid on the supply in question, with input tax being claimed on the purchase. But there could be a problem if they reward specific individuals.
Example. Acom Ltd has had a successful trading month, winning lots of commission from new orders, so the directors have agreed to take out all staff for a free meal and drinks at a local restaurant. John has been particularly successful, so he is given a crate of champagne worth £240 as a special reward just for him.
No output tax is payable on the food and drink and input tax can be fully claimed. Input tax can also be claimed on the cost of the champagne but output tax of £40 must be declared on the VAT return that includes the date when it is given to John, i.e. £240 x 1/6 = £40.
Pro advice 1. It is possible in situations such as the meal that the invoice from the restaurant will be made out to the individual director paying the bill with a personal debit or credit card. This is not a problem because the purpose of the expense is relevant to the business. As long as the business reimburses the director for the cost of the meal, then input tax can still be claimed.
Pro advice 2. The above Pro advice also applies to other costs, e.g. a hotel bill made out to the employee when they are away on a business-related trip.
Trips and team building
There is no also no problem claiming input tax if your clients arrange staff outings and similar events, team building exercises and staff parties. No output tax is payable, assuming the employees do not make any financial contribution to the event in question, e.g. via a payroll deduction. Any payment made by employees in this manner would be subject to output tax.
Pro advice 1. A common mistake made by clients is to claim input tax on costs relevant to spouses, friends and former employees, e.g. retired members of staff, who might be allowed to freely attend the event as well. In this situation, input tax is blocked on the non-staff costs under the rules of business entertainment.
Pro advice 2. A small charge to non-employees will mean that input tax can be claimed on the related cost, but output tax must be declared on the contribution made by the non-employee. For a token charge, e.g. £10 per person, the input tax claimed will usually be more than the output tax declared, so a positive VAT outcome is achieved.
Uniform or not?
Clothing for work is an expense category where VAT might often be overclaimed by your clients. Any clothes they freely provide to employees must relate to either a corporate uniform or protective clothing linked to their work duties in order to claim input tax.
It is not sufficient to provide normal day-to-day clothing on the basis that staff must look smart if they work in a shop or when meeting customers. For example, there would be no problem with claiming input tax on providing boiler suits or coveralls to staff for a car repair business, or safety clothing where it is required.
In its manual at VIT43800 (see Follow up ), HMRC refers to input tax being claimed on normal clothing bought for employees but then accounting for output tax when the clothes are given to the individual worker.
Pro advice. In this situation it’s probably best to not claim input tax in the first place. A key test to consider is whether the item in question could be used socially by the employee, e.g. for a night out at the local pub or visit to a theatre. If the answer is “yes” then it is probable that input tax cannot be claimed.
For the best VAT outcome, encourage your clients to ensure that staff rewards are made available to all staff. Advise them that input tax relevant to hospitality supplied to non-staff members, e.g. spouses and relatives, is blocked. However, this can be avoided by making a token charge for the event.
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.