Value Added Tax (VAT) is a tax on the UK’s supply of goods and services. It is charged at 20% on most goods and services. VAT-registered businesses collect VAT at each stage of production and distribution. Businesses then pass the VAT onto the next business in the chain. The final consumer bears the full cost of the VAT.

However, VAT-registered businesses can reclaim the VAT they have paid on their business purchases. This ensures that VAT is only paid by the end consumer. Reclaiming VAT helps businesses manage their cash flow and remain financially healthy. According to HMRC, businesses reclaimed around £150 billion of VAT annually.

What Purchases Can You Reclaim VAT On?

You can reclaim VAT on any goods or services purchased wholly and exclusively for your business. This includes:

• Raw materials, stock and components
• Business utilities like phone, electricity, gas, and water bills
• Transport costs like fuel, train or bus tickets
• Business equipment like machinery, tools, vehicles, furniture, computers, etc.
• Professional services like accountants, lawyers, consultants, architects, etc.
• Accommodation, food and drinks purchased while travelling for business
• Marketing, advertising and PR costs
• Training costs for employees
• Subscriptions and fees for business-related associations and organisations

However, there are some purchases where you cannot reclaim VAT:

• Food and drinks for your employees (unless it is part of a business event like a conference or meeting)
• Business entertainment expenses like taking clients out for lunch or dinner
• Personal goods or services used by you or your employees for non-business purposes

When and How Often Should You Reclaim VAT?

You can reclaim VAT on your business purchases whenever you want after registering for VAT. However, it is recommended to reclaim VAT regularly, at least every three months. This helps improve your business cash flow.

The most common ways to reclaim VAT are:

• Input VAT – You can deduct the VAT paid on your purchases from the VAT you have charged on your sales. The difference is then paid to HMRC.
• VAT Return – Most businesses complete a VAT Return every three months and reclaim VAT this way. The VAT Refund is paid into your nominated business bank account.
• Annual Accounting Scheme – If your taxable turnover is under £1.35 million, you can choose to complete one VAT return per year.

Records Needed to Reclaim VAT

To reclaim VAT, maintain proper records and keep valid purchase invoices. The invoices must clearly show the following:

• The supplier’s name, address and VAT registration number
• The date and time of supply
• A description of the goods/services supplied
• The VAT rate charged
• The total amount payable, excluding VAT
• The total amount of VAT charged.

Digital VAT invoices are acceptable. You should retain invoices for at least six years in case of a VAT inspection.

Errors to Avoid When Reclaiming VAT

Some common errors businesses make when reclaiming VAT include the following:

• Incorrect VAT calculations on invoices
• Reclaiming VAT on non-business, exempt or partly exempt purchases
• Missing invoices or lack of sufficient records
• Reclaiming VAT on employee expenses or business entertainment
• Delaying VAT returns resulting in late reclaims and poor cash flow

Getting a VAT accountant to handle your VAT records and returns accurately is advisable.

HMRC Monitoring of Business VAT Claims

HMRC takes VAT fraud and errors very seriously. They have stringent monitoring systems and powers to deal with non-compliance. HMRC may inspect your business records, invoices and VAT account without notice. If errors or fraud are found, they can charge penalties of up to 100% of the VAT reclaimed. Serious cases may lead to criminal prosecution.

To avoid problems, you should ensure you:

• Maintain accurate VAT records
• Only reclaim VAT on valid business expenses
• Comply with VAT rules and your legal obligations
• Disclose all your income and expenses truthfully

Reclaiming VAT on business purchases is vital for managing cash flow and finances. With proper invoices and records, businesses can easily reclaim the VAT paid. Staying compliant with VAT rules and being prepared for HMRC inspections will ensure your business remains reputable and avoids substantial penalties.