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Introduction

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There are many expenses a business may incur in the course of purchasing goods or services and as such these will either be Standard Rated, Zero Rated, Exempt, Outside the Scope or Reverse Chargeable (where purchased from non UK suppliers).  The recovery of any VAT incurred on expenses will depend on the nature of supplies (sales) the business is making. 

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• A business that makes only Standard Rated sales would be entitled to the full recovery of this input VAT from HMRC. 

• A business that makes Standard Rated and Exempt supplies would only be able to partially recover VAT on its expenses under the Partial Exemption Rules  (See how VAT works button)

• A business that makes only Exempt supplies of goods or services will in most cases not be able to recover any VAT incurred on expenses

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The List below outlines the VAT treatment of common business purchases from VAT registered Businesses: 

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Rent and Service Charges

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Rent and Service charges incurred on a businesses principal place of business will normally be exempt but can be standard rated if the landlord has opted to tax or charge VAT.  Note where a business is changed VAT on Rent and Service charges, it can normally recover this VAT from HMRC where it makes taxable or standard rated supplies itself.  

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Professional Fees

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Professional fees for Accountancy, Legal, Architecture and Consultancy services are standard rated when purchased in the UK (including IOM) and Reverse Chargeable when purchased from outside the UK. ( Please see Reverse Charges button for more details on accounting for reverse charges) . VAT Recoverable from HMRC. 

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Hardware and other Peripherals

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Hardware such as computers, monitors, keyboards, scanners and printers are all taxable at the standard rate when purchased in the UK (including IOM).  If these items are purchased from outside the UK then UK import VAT at 20% will be payable. VAT Recoverable from HMRC. 

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Software

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The purchase of software in the UK (inc IOM) will attract VAT at the Standard Rate 20% and will be Reverse Chargeable if purchased from a non UK supplier. VAT Recoverable from HMRC. 

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Fuel

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Fuel including petrol and diesel is Standard Rated  and can be recovered from HMRC where:

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• The fuel is used for business use

• The appropriate fuel scale charge is used where the fuel is used for private use

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Restaurant Food and Catering

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Breakfast, Lunch and Dinner, Drinks while eating in  a restaurant will attract 20% Standard Rated VAT.  Hot Takeaway food will also be Standard Rated.  VAT Recoverable from HMRC.  Note - Cold takeaway food is Zero Rated so no VAT is charged. 

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Tools and Equipment

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The purchase of tools and equipment for use by trades men and women in the UK (incl IOM) will be Standard Rated. 

VAT Recoverable from HMRC. 

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Materials in Building Trade

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Most items that are considered  building materials and sold by builders merchants are charged at the Standard Rate. 

VAT Recoverable from HMRC. 

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Children's Clothing & Footwear

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The sale of children's clothing and footwear is Zero Rated. Note there are conditions that govern the ability to Zero Rate and can be read in detail here.  Young children's clothing and footwear (VAT Notice 714)

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Electricity and Gas

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VAT is charged by utility companies for Gas and Electricity at the Standard Rate 20% unless their use of Gas and Electricity is below the de minimis usage limit in which case VAT would be charged at the reduced rate of 5%.

VAT Recoverable from HMRC. 

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Business Rates

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Business Rates are outside the scope of VAT

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Business Entertaining

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Most forms of business entertainment such as taking customers to restaurants for meals and drinks or to pubs or bars, golf days, football matches etc will incur VAT at the Standard Rate.  However the VAT on such entertainment for UK customers is not recoverable from HMRC (blocked from recovery).  VAT on overseas entertainment is recoverable where the entertainment is for purely business purposes and the individuals being entertained do not receive any private benefit as a result.  Note there is a fine line between purely business entertainment and private entertaining so in practice many businesses may block business entertainment regardless of whether it takes place in the UK or abroad.

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Staff Entertaining

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Where an employer provides entertainment for the benefit of employees for example to reward them for good work or to maintain and improve staff morale, it does so wholly for business purposes.

Thus the VAT incurred on entertainment for employees for example staff parties, team building exercises, staff outings and similar events is input tax and is not blocked from recovery from HMRC under the business entertainment rules.

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However, there are two exceptions to the general rule. These are where:

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• Entertainment is provided to directors, partners or sole proprietors of the business

• Employees act as hosts to non-employees

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Staff Subsistence 

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VAT incurred by employees for subsistence  while carrying out their work duties away from the normal place of work is recoverable where the actual cost of the subsistence such as meals is reimbursed or paid by the employer.  VAT Recoverable from HMRC. 

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Hotel Accommodation

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Hotel accommodation costs incurred in the UK (incl IOM) will normally include VAT and where this is paid by a business for its employees while working away on business, it can be recovered from HMRC. VAT Recoverable from HMRC. 

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Hotel Accommodation costs incurred abroad are likely in many instances to include overseas VAT as the place of supply of Hotel Accommodation is where the hotel is located. (See Land & buildings)

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Note: As the place of supply for Hotel Accommodation is where the Hotel is located, the cost would not be subject to the Reverse Charge procedure in the UK

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Mobile Phone costs

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The purchase and connection of mobile phones for business use will include VAT at the standard rate 20%. This VAT can be recovered where the phones are used for business purposes. VAT Recoverable from HMRC. 

 

Phones provided by businesses to their employees where the business covers the cost of calls for business use (and any small amounts incurred for private use) can treat the input VAT as its own and recover the VAT. VAT Recoverable from HMRC. 

 

If the business charges employees for calls made on mobile phones it has provided, it must also charge output VAT on the amounts charged to their employees.

 

If Employee are allowed to make private calls on mobile phones provided by a business, then the business should analyse calls between business and private use to ensure a fair and reasonable recovery of VAT is made.

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Telephone Land Line and or Broadband Services

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Telephone land line and broadband setup costs and monthly charges will include VAT at 20% Standard Rate.  VAT Recoverable from HMRC. 

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Delivery Charges

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Delivery charges which are contractually included in the supply of delivered goods follow the same VAT liability of the goods themselves.  If the goods being delivered are Zero Rated then any separate charge for delivery will be Zero Rated.  Where there is a separate contract or arrangement for delivery, then a separate supply of delivery will occur and this charge will be standard rated.  VAT Recoverable from HMRC. 

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Motor Vehicle expenses

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Motor Expenses incurred on company cars such as repairs and servicing, parts, parking etc will incur VAT at the Standard Rate. 

VAT Recoverable from HMRC. 

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If you use a vehicle for business purposes, you can reclaim the VAT you were charged on repairs and maintenance as input tax as long as the business paid for the work. It does not matter if the vehicle is used for private motoring or if you have chosen not to reclaim VAT on road fuel.

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Note: - If you’re a sole proprietor or partner and use a vehicle solely for your own private motoring you cannot reclaim the VAT from HMRC on repairs as input tax.

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Charging Electric Vehicles Expense

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Businesses Charging Electric Vehicles - VAT incurred by businesses when charging electric vehicles can be recovered on the business use of those vehicles, where the vehicles are charged at work or at public charging premises.  You can also recover the VAT for charging your electric vehicle if you’re a sole proprietor or a partner in a partnership business, and you charge your electric vehicle for business purposes at home.

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You should work out how much of the cost of charging your electric vehicle is for business use and how much is for private use by keeping mileage records. The normal input tax rules then apply.

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Employees Charging Electric Vehicles - If an employee charges an electric vehicle (whether this is a company vehicle or not) at a public charging point, the supply of electricity is made to the company or employer. They can recover the VAT on the cost of charging the electric vehicle.

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The employer must keep detailed mileage records to work out how much of the charging cost is used for business and private purposes where applicable.

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Where an employee charges an electric vehicle (whether this is a company vehicle or not) at home, the overall supply of electricity is made to the employee and not the employer.

The employer is not entitled to recover the VAT on the cost of charging the electric vehicle.

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Advertising

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Advertising costs will have 20% VAT applied if purchased in the UK and will be reverse chargeable if purchased from outside the UK. 

VAT Recoverable from HMRC. 

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Sponsorship

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Sponsorship is a payment to a charity, social project or a business for which the sponsor receives something in return. Payment may be in the form of money, goods and services (commonly referred to as ‘barter’), or a combination of money with goods and services.

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Sponsorship  is outside the scope of VAT where it is provided as a form of charity.  Where sponsorship involves one party being obliged to provide funds etc to another party in return for benefits such as  advertising, logo promotion, entertaining, brand promotion etc, then the Supply in Standard Rated. VAT Recoverable from HMRC. 

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Business Expenses Incurred Prior to VAT Registration

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Input VAT on goods and services incurred by a business prior to being registered for VAT can be treated as recoverable input VAT where it is attributable to taxable supplies made by that business. 

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The conditions for recovering VAT on goods prior to VAT registration are as follows:​

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• The goods were supplied not more than 4 years before the business was registered or was required to be registered

• The goods were supplied to the person who is now registered for VAT

• The goods were obtained for the business which is now covered by the VAT registration and related to its taxable activities — if the services related partly to taxable activities and partly to other activities, you must work out what proportion of the use of the services related to the taxable activities

• You still hold the goods or they have been used to make other goods which you still hold

• You compile a stock account of the goods — this must show the quantities of goods and the dates when you obtained them, and if you used any goods to make other goods, or disposed of them after you were registered for VAT, the account must give details, with dates

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Note: Remember, you cannot claim VAT incurred on goods which have been completely used up before registration.

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You can treat the VAT on services that you received before you were registered as if it were input tax. If:

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• The services were supplied not more than 6 months before the business was registered or was required to be registered

• The services were supplied to the person who is now registered for VAT

• The services were received for the purposes of the business which is now covered by the VAT registration and related to its taxable activities — if the services related partly to taxable activities and partly to other activities, you must work out what proportion of the use of the services related to the taxable activities

• The services were not related to goods which you disposed of before you were registered (such as repairs to a machine which was sold before registration)

• You compile an account of these services, this must describe the services and the dates when you received them and, if the services related to goods which you disposed of after you were registered for VAT, the account must give details, with dates​​

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-Contains public sector information licensed under the Open Government Licence v3.0.

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