Your bookkeeper is preparing your latest VAT return which includes expenses paid by your employees, some of which include VAT. How much of this can you reclaim and what supporting evidence must you have?
Right to reclaim VAT
Registered businesses can reclaim VAT on the cost of supplies received in the course of their trade. However, not all VAT paid can be reclaimed. For example, VAT on expenditure for private and other non-business purposes and VAT incurred in connection with exempt supplies you make must be excluded. In all cases where VAT is reclaimed you must have evidence to show the supply was made for your business and in connection with the VATable supplies it makes.
Tip. It doesn’t usually matter who paid for the supplies, or whose name is on the invoice or receipt, as long as the supply was for your business’s trade. This means your business can reclaim VAT paid by one of its employees, if conditions are met.
Tip. For VAT claim purposes contractors working for your business count as employees.
Conditions
HMRC won’t quibble about claims for VAT paid by employees and contractors working for you where your business ultimately bears the full cost of the expense, i.e. by reimbursing the employee or contractor. HMRC’s internal guidance includes the following list of the most common types of purchase employees make for and on behalf of the business employing them:
- road fuel and other motoring expenses
- removal expenses arising from company relocations or transfer of staff
- sundry items such as small tools or materials purchased on site
- subsistence costs such as meals and accommodation necessarily paid for while away from the normal workplace (but not where the meal is taken as part of business entertainment).
As a rule of thumb, VAT on meals etc. can be reclaimed where the employee or contractor is working more than five miles away from their normal workplace.
Tip. As with all purchases on which you reclaim VAT, those paid for by an employee or contractor which are not wholly for your business’s trade can’t be reclaimed in full. Instead a proportion is reclaimable. Where an expense, e.g. the full cost of an employee’s mobile phone bill, is reimbursed to them, you must reclaim only the proportion attributable to the business use.
Tip. Any fair and reasonable method of calculating the business use can be used.
Evidence required
You must have evidence of VAT paid on purchases. Usually this will be the original invoice or VAT receipt from the employee or contractor.
Tip. To incentivise your employees to provide the necessary evidence with their expenses claims, consider introducing a policy of reimbursing only the VAT-exclusive amount of an expense unless the employee provides the VAT invoice or receipt. Of course, you have to take a reasonable approach to this. For example it’s not always easy or even possible to get a receipt for, say, a taxi fare, which in any event might not have included VAT. Plus, HMRC allows VAT to be reclaimed on some low value expenses without a receipt or invoice as evidence.
You can reclaim VAT paid by an employee or contractor if the purchase is intended for use in your business and you reimburse them for the full cost. The usual evidence of VAT paid is required but it’s OK if it’s in the employee’s/contractor’s name.
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.