VAT on expenses: What can I claim for?
Dealing with business expenses is an inevitable part of bookkeeping for law firms. It is a particularly tricky area when it comes to VAT compliance, however, because the input VAT recovery can often depend on the circumstances. This article explains when VAT can and cannot be recovered.
Travel and subsistence
Businesses regularly pay expenses to employees to cover their costs of working away from their usual place of work. These costs (hotels, train travel, meals) are incurred for the purposes of the business, and therefore VAT is recoverable, providing there is a valid VAT receipt.
Employers can also recover the VAT on telephones used by employees – however, apportionment should be considered where an employee is allowed to make private calls without charge and this private usage is more than incidental.
It is common for law firms to hold events to reward staff or customers – but when is the VAT reclaimable on the costs incurred in running the event?
The general rule states that VAT on entertaining customers is blocked, and that VAT on entertaining employees is recoverable. HM Revenue & Customs (HMRC) defines entertaining widely, to cover everything provided free of charge, from the obvious things such as food and drink, to the more obscure (yachts, for example). There is an exception to this rule: where the entertainment is only provided to the partners or directors of the business and not to staff in general, then the input VAT is not recoverable.
If both employees and customers were invited to, say, a hired box at a sporting event, the lines become more blurred and the VAT recovery will depend on the circumstances. The input VAT should be apportioned on a fair and reasonable basis unless the employees attend only to be hosts to the customers, when the VAT for the whole event would be blocked from recovery.
When it comes to staff perks, input tax can be recovered on costs such as gym membership if it is for overall staff benefit, and not for specific employees or the business owners. For staff and customer gifts, the input VAT is reclaimable, but should be matched by an equivalent output VAT charge – because effectively, this purchase is being put to personal use. However, this does not apply to one-off gifts below the value of £50 that are not part of a series of gifts.
Personal use extends to more than just employee perks. If a car is used for personal and business use, then this also has implications for VAT – there are specific rules in relation to how costs should be accounted for in relation to fuel, leases and the purchase of cars.
If a business pays an employee or partner a mileage allowance for business journeys in their own car, then there is a specific VAT element of this mileage claim that can be reclaimed, depending on the make and model of the car (and providing a VAT receipt is attached to the claim). However, if a business pays for all of the fuel in relation to a car, and it is used privately as well as for business use, then a ‘fuel scale charge’ should be applied. This is an adjustment on the VAT return to account for output VAT on the personal use element. The fuel scale charge is set by HMRC and is applicable irrespective of the level of private use.
It is becoming more common for vehicles to be leased rather than bought outright. There are many different forms of leases on the market and the VAT treatment of these depends on when or if the title of the ownership of the vehicle passes. If the business leases a car in the form of a monthly rental where the ownership does not pass, then a VAT rule kicks in that makes 50% of the input VAT charged on the lease irrecoverable, regardless of the level of private use of the car. This has caught out many businesses where the VAT on the invoice has been reclaimed in full.
On the whole, the VAT charged on a car purchased by a business is blocked from being recovered. There are very limited circumstances where VAT can be reclaimed, for example on a pool car that is kept at the business premises, not allocated to a particular employee, and subject to a written policy to prohibit private use of the car. HMRC is strict in its application of this rule – it is very difficult to prove that a car is not available for any private use.
VAT is a complex area and if you are in doubt as to the correct VAT treatment of an invoice, it is always worthwhile speaking to a specialist.