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Companies can reclaim VAT on expenses in certain circumstances. This includes travel, hospitality, food, and fuel expenses.But the legal provisions differ depending on the type of expense incurred.
It’s vital to know the rules to ensure you’re properly managing company money. Keep in mind that rules around VAT can be tricky because often it’s on a case-by-case basis. If in doubt, we encourage you to contact a professional accountant or HMRC.
The basics: how does VAT work?
VAT, or value-added tax, is a tax that appears on consumer goods and services. It’s spread throughout the supply chain, so the burden of the tax doesn’t fall solely on the consumer at the end of the chain.
Avalara provides a great real-world example of VAT in action:
"A raw materials dealer sells its product to a factory for £101, £1 of which is VAT. The raw material dealer sends the £1 to the tax authority.
With the material, the factory produces laptop batteries, which it sells to a laptop manufacturer for £202. £2 is VAT — £1 of that reimburses the factory for VAT it paid to the raw materials dealer, the other £1 it pays to the government for its VAT.
The laptop manufacturer then sells the laptops to a computer retailer for £303, which includes a £3 VAT — £2 reimburses the manufacturer for VAT paid to the factory, and £1 goes to the tax authority.
Finally, the computer retailer sells a laptop for £404 — keeping £3 of VAT for reimbursement and sending £1 to the government.
Each additional £1 along the supply chain represents the value added at each stage."
This is unlike sales tax, where the tax is only paid once (by the retail customer, who pays the entirety of the tax).
More than 170 countries use the VAT system, although each country has its own rate. In the EU, this rate can’t be below 15%. In the UK, the standard VAT rate is 20%.
VAT on expense reports: for employees
When employees travel for work or make a business-related purchase, there are a couple different ways to pay for the associated costs. The employee either receives a per diem or scale rate (a fixed amount to spend per day provided by the company), or they pay out of pocket and get reimbursed later.
Note: Companies cannot claim VAT back if they pay employees a flat rate for travel expenses.
The reimbursement is usually done via an expense report, where the employee fills out a form detailing what they spent. Then they attach or scan the corresponding receipt for every purchase.
Final step? Submit to the finance team, and then it’s done. All that’s left to do is wait for the reimbursement to arrive, usually around the next payment cycle.
So how do you take VAT into account on these expense claims? Are employees allowed to claim back VAT that they’ve spent while traveling or purchasing something for work?
The employee is usually reimbursed for all of their business-related expenses, including VAT. Then the company can claim back some or all of the VAT with the government. We’ll explore this in more detail below.
The best way to do this is to invest in an automated expense management solution like Spendesk. We take the guesswork out of claiming VAT by collecting receipts easily. As an added bonus, our tool extracts VAT automatically.
If you don’t have a spend management platform, you’ll have to manually separate VAT. Our expense report template should help! This will make life easier for the company’s finance team.
VAT claims: for companies
After employees submit their expense reports, companies can claim VAT expenses back to recoup some or all of the cost.
Whether company funds are spent on travel, assignments, accommodation, or entertainment, there are certain legal requirements to keep in mind.
For a company to be able to claim back the VAT rate on employee expenses, a number of requirements must be met:
Expenses incurred must serve company interests
A proper invoice, stating the amount of VAT and other details, must be recorded for each expense
Each bill must be addressed to the company, not to one of its managers or employees
The company must be VAT registered
How VAT claims are calculated
According to HMRC, “the VAT you pay is usually the difference between any VAT you’ve paid to other businesses, and the VAT you’ve charged your customers.
If you’ve charged more VAT than you’ve paid, you must pay the difference to HMRC.”
VAT on business travel and assignment expenses
Naturally, employees on business trips will need meals, accommodation, and transportation while working away from their home base.
As mentioned above, companies can choose to pay flat rates to provide for the employee’s stay. But then they can’t claim any VAT back. If they go the expense report route, there’s an opportunity to claim VAT back from the government.
According to HMRC:
“You can reclaim VAT on employee travel expenses for business trips. Travel expenses can include transport, meals and accommodation that you pay for.”
And if expenses are business-related but not travel-related? Some of those are eligible for VAT claims as well.
But, as always, there are caveats!
Transportation
Companies can reclaim VAT on transportation costs accrued during employee business travel. But the following modes of transportation are not eligible for VAT reclaim:
Planes
Trains
Public transport
In fact, any form of transportation that’s built to carry 10 or more people is a zero-rated means of transport. This means that there’s no VAT in the first place, therefore it’s impossible to reclaim VAT on these expenses.
Meals
Normal employee lunches aren’t eligible to reclaim VAT. But meals during a business trip? Those are definitely eligible. Be sure to remind employees that they need full receipts with the VAT clearly visible.
It's possible your company prefers to go with the scale rate (or per diem) option for meals. In that case, you can read our guide to HMRC meal allowance rates.
Fuel
Fuel used for business purposes may be eligible for reclaiming VAT. You’ll have to do some calculations to decide which expenses are personal and which are business-related. Then, you must provide proof to HMRC.
According to HMRC:
“There are different ways of reclaiming VAT on fuel, if you do not pay a fixed rate under the Flat Rate Scheme.
You can reclaim all the VAT on fuel if your vehicle is used only for business.
If you use the vehicle for both business and personal purposes, you can either:
reclaim all the VAT and pay the right fuel scale charge for your vehicle
only reclaim the VAT on fuel you use for business trips - you’ll have to keep detailed mileage records.”
We have a more in-depth guide to the UK's mileage allowance here.
Accommodation
Hotels and business travel accommodations are eligible for VAT claims. But as stated above, the invoice must be in the company’s name, not the employee’s.
Entertainment
This is probably the trickiest area for VAT reclamation.
If you’re throwing a party for employees, you can reclaim VAT for expenses related to the party. However, there’s a limit per person that you’re allowed to spend.
If you’re hosting an event for clients but not employees, those expenses are not eligible for VAT reclamation.
Similarly, sport or theatre tickets for clients or business partners are not eligible for VAT. Yet when given to employees, those expenses are eligible. If you’ve got questions about these distinctions, HMRC will have the answers.
As always, we suggest you defer to HMRC , a tax expert, or a qualified accountant for in-depth guidance for your VAT returns.
Best practices for VAT expenses
Understanding VAT-related legal provisions on expense reports not only facilitates effective cash flow management, but also saves you the risk of sanctions in the event of a tax audit.
Here are some tips that may help:
To claim back VAT, you must maintain meticulous records for up to ten years. Keep your receipts!
Make sure employees know the rules. A good expense policy is key
Opt for an automated solution to save countless hours of precious time, not to mention frustrations associated with manual expense reports
Prioritise visibility on all company spend.
A spend management platform will help you avoid VAT headaches. Spendesk enables finance teams to skip the manual processes so they can save time and focus on more important tasks.
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