If you are registered for standard rate VAT you can claim back the VAT you pay on expenses – but make sure you have proof of VAT paid.
When you are standard rate registered for VAT the VAT that you owe to the HMRC is calculated as:
VAT received (charged on invoices) less VAT paid (paid on expenses)
It is of the utmost important, as a standard rate registered business, that you update all of your expenses on a monthly basis and make sure that you show the net and VAT amounts separately.
It is also important not to assume the VAT on expenses.
What VAT can be reclaimed?
You can usually reclaim the VAT paid on goods and services purchased for use in your business.
If a purchase is also for personal or private use, you can only reclaim the business proportion of the VAT.
There are 3 different rates of VAT and you must make sure you claim the right amount:
- Standard Rate
- Reduced Rate (Example: electricity which is charged at 5%)
- Zero Rate (Examples: books and newspapers, motorcycle helmets)
You cannot claim VAT for:
- Goods and services are outside the VAT tax system. For example, out of scope items include: goods or services you buy and use outside of the EU; statutory fees – like the London congestion charge; goods you sell as part of a hobby – like stamps from a collection; donations to a charity – if given without receiving anything in return
- Business entertainment costs
Most contractor expenses fall under travel and subsistence which, for the most part, don’t incur VAT. There are exceptions – take an Uber and you will pay VAT but take the tube and you won’t. Likewise with food – there is no VAT charged on an apple but there is 20% on a packet of crisps. Although most traditional bakery products, such as bread, biscuits and cakes, are zero-rated, some confectionery is standard-rated including biscuits wholly or partly covered in chocolate (or some product similar in taste and appearance); and any item of sweetened prepared food, other than cakes and non-chocolate biscuits, which is normally eaten with the fingers
This is why you will need to be careful when entering your expenses and always do it as per the receipt – it’s not as straightforward as applying 20% to the cost.
What should an invoice/receipt show?
You can’t reclaim VAT using an invalid invoice, pro-forma invoice, statement or delivery note.
A valid VAT receipt should include all of the following details:
- A unique invoice number
- The seller’s name or trading name and address
- The seller’s VAT registration number
- The invoice date
- The tax date (the date of supply which is also known as tax point –if different from the invoice date)Y
- Your name or trading name and address (i.e. the customer)
- A description sufficient to identify the goods or services supplied
- For each description, the quantity of the goods or the extent ofthe services, and the rate of VAT and the amount payable, excluding VAT,expressed in any currency
- The gross total amount payable, excluding VAT, expressed in anycurrency
- The rate of any cash discount offered
- The total amount of VAT chargeable, expressed in sterling
- The unit price
VAT receipts with all of the above detail are not always necessary. Retailers can issue less detailed invoices for sales under £250 (including VAT) and are not required to issue an invoice unless the customer requests it.
These need only show:
- The seller’s name and address
- The seller’s VAT registration number
- The date of supply (tax point)
- A description of the goods or services supplied
- The total amount payable including VAT
If the sale includes items at different VAT rates then for each different VAT rate the simplified VAT receipt must also show:
- The gross amount payable including VAT
- The VAT rate applicable to the item
For example, if you buy an electrical item from a store for your business (such as a new computer) the price you pay will include VAT at the standard rate (20%). If you also buy postage stamps for your business whilst you’re in the store, these won’t include VAT because they’re exempt from VAT. As the sale includes items at different VAT rates, the VAT receipt must show the different rates.
Food
There is always confusion as to how food is treated for VAT purposes. If the food is purchased from a supermarket, one rule may apply. If the same food is bought from a café a different rule could apply.
There is also a difference between hot food, cold food, food consumed on premises, food consumed off premises and of course between biscuits and cakes.
We always advice that you ask for a VAT receipt showing the breakdown of the VAT to avoid any confusion, or if this is not possible, err on the side of caution and don’t claim any VAT.
An example of an item on the list of expected items, to illustrate the confusion:
Confectionery, not including cakes or biscuits other than biscuits wholly or partly covered with chocolate or some product similar in taste and appearance. Confectionery includes chocolates, sweets and biscuits; drained, glace crystallised fruits, any other sweetened prepared food normally eaten with the fingers.
The below flow chart can be used to help decide whether zero or standard rated VAT applies:
