Common VAT Problems

4. Unreclaimable Tax

4.1 You cannot reclaim VAT on supplies for personal (non-business) use.

• If you buy goods or services for both business and non-business use, you may apportion the VAT between them.You can only recover VAT on the business element, subject to the normal rules.
• Or, you can recover VAT on the purchase of all the goods, and then account for VAT on the non-business element as a supply for personal use.

4.2 You can only reclaim VAT on some of the supplies you make to employees.

• You can reclaim VAT on the actual costs of employees' subsistence when travelling on business.
• If you pay flat-rate expenses, however, you will not be able to reclaim the tax.
• You cannot generally reclaim VAT on free domestic accommodation you provide.
• You can reclaim VAT on the cost of business mileage paid to employees using their own vehicles. See VAT Notice 700/64 for the calculation you must use.

4.3 There are particularly strict rules about supplies to sole traders, partners or directors. The rules are less generous than those which apply to ordinary employees.

• You cannot reclaim VAT on free meals at work. But you can for subsistence expenses while on business trips (but not for entertaining).

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

• You cannot reclaim VAT on business entertainment.
• You may be able to reclaim VAT related to staff entertainment. The entertainment must have a discernible business purpose, such as teambuilding.
• Where the entertainment is for both employees and outsiders, it may be possible to reclaim some VAT.

4.5 You cannot usually reclaim VAT on supplies purchased in order to make exempt sales.

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