Common VAT Problems

4. Irreclaimable Tax

4.1 Input VAT cannot be reclaimed on supplies for personal (non-business) use.

• If goods or services are bought for both business and non-business use, the input VAT may be apportioned with only the business element recovered, subject to the normal rules. Or, recovered in full on the entire purchase of goods provided output VAT is declared on a self-supply of the non-business element.

4.2 Input VAT can be reclaimed on some of the supplies made to employees including on:

• The actual costs of employees' subsistence when travelling on business (excluding any flat-rate expenses).
• Any free meals that may be provided.
• VAT can also be reclaimed on the cost of business mileage paid to employees using their own vehicles. See VAT Notice 700/64 for the calculation that must be used.

4.3 There are strict rules applied to sole traders, partners or directors.

• They cannot reclaim VAT on free meals at work, but subject to normal rules can claim for subsistence expenses while on business trips.

4.4 The treatment of entertainment varies, according to who is being entertained.

• VAT on business entertainment for third parties can never be reclaimed.
• Reclaims may be allowed for VAT related to staff entertainment. The entertainment must have a discernible business purpose.
• Where the entertainment is for both employees and outsiders, it may be possible to reclaim some VAT.

4.5 Generally, a business cannot reclaim VAT on supplies purchased in order to make exempt sales.

• Small amounts may be reclaimed if within certain set limits.The calculation of recoverable VAT in this instance is complex. Get expert advice.