To reduce your commuting costs you’re moving home to be near your workplace. If your company meets all or part of your personal moving expenses, can it reclaim the VAT?
Relocation
Moving home is mostly a personal choice and consequently so are the costs relating to it. The usual rule is that VAT paid on expenses incurred for private reasons can’t be reclaimed, even where it’s paid by a registered business. However, HMRC applies an exception for some expenses where they relate to the relocation of employees. For this purpose directors count as employees.
Corresponding income tax exemption
You’re probably already aware of the income tax exemption for relocation expenses. It applies if an employee relocates so they can take up a new job, new employment duties or their employer moves location. The employer can pay up to £8,000 of the employee’s relocation costs without it counting as a taxable perk. The only requirement is that the employee lives within a “reasonable daily travelling distance” after the move whereas they didn’t before.
Tip. Contrary to popular belief, the special VAT treatment is not subject to the same tight conditions, neither does it rely on the expenses qualifying for the income tax exemption. This means, for example, that it isn’t limited to £8,000.
VAT conditions
The key requirement for VAT is that the reason for an employee’s relocation is for business purposes. In practice that means there needs to be a clear business advantage or function for the move. So, if there’s a clear case that the distance they have to commute is interfering with the employee’s ability to do their job, that will usually be a sufficient reason for HMRC to allow the business to recover the VAT. Plus, the supply of services rules, which require an employer to account for VAT on expenses etc. if they have a private aspect, don’t apply.
What can VAT be reclaimed on?
You can recover VAT on a wide range of removal expenses such as:
- estate agent’s fees
- the removal firm’s charges
- maintenance and gardening at an employee’s former property while it is up for sale
- short-term accommodation in a hotel.
Trap. Expenditure forming part of the ongoing living expenses at the employee’s new home can’t be reclaimed. Therefore, VAT paid on, say, the cost of new curtains or carpets for the new home can be reclaimed, if those from the old home aren’t suitable. On the other hand, VAT on the cost of a new TV can’t be reclaimed because the old TV would work just as well in the new property and so the expense is not tied to the relocation.
Invoices
The usual rules apply to invoices. As the relocation expenses have a business purpose your company can reclaim VAT even if one or more of the invoices show the employee’s name or the expense was reimbursed to them. It might raise fewer questions from HMRC if the papers are in the name of your business, but it’s not vital.
Tip. Tell your bookkeeper to note on the invoices that they relate to relocation expenses. This may prevent unnecessary questions from HMRC.
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.