VAT – what you can and can’t reclaim

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For most fully taxable businesses, VAT can be reclaimed on goods and services used in the business. This means that businesses must consider where there is personal or private use of goods or services bought for the business and can usually only reclaim the business proportion of the VAT.

For example, VAT is recoverable on all the costs of mobile phones provided to employees where no personal use is allowed. Where businesses allow private calls to be made at no charge the VAT recovery must be apportioned on a fair and reasonable basis. Where employees pay for the private use of their phones the business is allowed to reclaim the input tax in full provided an output tax charge is accounted for in respect of private use.

You cannot reclaim VAT for:

  • goods and services your business uses to make VAT-exempt supplies;
  • business entertainment costs;
  • goods sold to you under one of the VAT second-hand margin schemes;
  • business assets that are transferred to you as a going concern;
  • anything that is only for private use – you can usually reclaim the VAT paid on goods and services purchased for use in your business. If a purchase is also for personal or private use, you can only reclaim the business proportion of the VAT:

Example

Half of your mobile phone calls are private. You can reclaim 50% of the VAT on the purchase price and the service plan.

You work from home and your office takes up 20% of the floor space in your house. You can reclaim 20% of the VAT on your utility bills.

You must keep records to support your claim and show how you arrived at the business proportion for a purchase. You must also have valid VAT invoices.

There are special rules for reclaiming VAT for:

·        individual computers and single pieces of computer equipment costing £50,000 or more before VAT

·        aircraft, ships and boats costing £50,000 or more before VAT

·        land and buildings costing £250,000 or more before VAT

You may need to adjust the amount of VAT you reclaim over several years using the Capital Goods Scheme.

Partial exemption

There are different rules for a business that incurs expenditure on taxable and exempt business activities. These businesses are partially exempt for VAT purposes and are required to make an apportionment between their activities using a ‘partial exemption method’ to calculate how much input tax is recoverable.

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