Q – As a business what sort of costs are we unable to reclaim VAT?

A – As a general rule if goods or services are bought for a business purpose, the business itself supplies taxable (as opposed to exempt) goods and services, and a valid VAT invoice is held, then the VAT charged by a supplier can be reclaimed as input tax.

Common items that might be disallowed by a VAT Inspector would be purchases relating to personal interests such as domestic accommodation, or sports or leisure activities. VAT on business entertainment, taking clients to lunch, etc., would be disallowed although it is possible to reclaim VAT on the cost of entertaining staff.

Cars are tricky, because if they are simply “available” for private use then recovery as input tax is blocked, although the eventual sale would be exempt. It is however legitimate to recover VAT on pool cars and cars used by the business, like taxis or driver instructor vehicles.

Businesses often think that they cannot reclaim VAT on items bought as gifts for clients, say at Christmas. In fact you can reclaim the VAT on these purchases, but if the value of the gift provided exceeds £50, output tax must be declared to the value of the input tax reclaimed.

Similarly if you convert a room in your home for office use, it is possible to reclaim 100% of the VAT on the costs. If you do and sell your home within 20 years then an amount of VAT would have to be paid back. Using 10 years as an example, a VAT Inspector would expect you to hand back 50% (e.g.10 years as a proportion of 20). This payback mechanism however is easily avoided as long as you do not recover 100% of the VAT on the original cost. If say only 95% was reclaimed, because of an element of private use, then the payback mechanism does not apply.

It is not unusual when a business applies for a loan for the bank to make the business pay for an independent valuation of the asset to be purchased. Unfortunately the fact that you pay for the service does not allow you to reclaim the VAT charged, as it is the bank that instructs the ‘valuer’, and it is them that receive the VAT invoice and of course the benefit of the valuer’s services.

Another area where businesses are often caught out is where VAT has already been reclaimed on purchases but the supplier has not been paid within 6 months of the due date of payment. If this is the case then the VAT reclaimed has to be repaid. This is because the supplier at that time is able to claim Bad Debt Relief.

These are only some of the areas where it is possible to fall foul of the VAT man. The rule here is if you are uncertain whether you can reclaim VAT on a purchase take advice. An error repeated over 4 years could add up to a significant amount and worse might also attract a hefty penalty.

TaxWise is available to help answer any tax queries. Just call the Advice Service on 01455 852555 and one of our specialists will be happy to help.