Reclaiming VAT

VAT registered businesses can generally reclaim Value Added Tax (VAT) paid on any goods and services purchased for business use. However, there are various rules and exceptions, some of which we will explore below.

The full amount of VAT can be reclaimed in respect of any valid business purchases - where the goods or services purchased are used purely for business purposes. In order to reclaim VAT, the business selling the goods or services must also be VAT registered, and should supply VAT invoices.

Business purchases which are also for personal use (eg a mobile phone contract which is used to make both business and personal calls) are only VAT deductible for the proportion of business use (eg if only 50% of calls are made for business purposes, only 50% of the VAT of the contract cost can be reclaimed).

VAT cannot be reclaimed on any goods or services which are solely for personal or private use (ie which are not used for business purposes); this is irrespective of whether the purchase was made by the business/using a business credit card etc. Furthermore, VAT cannot be reclaimed in respect of:

  • Goods or services which are VAT exempt (eg insurance, postage stamps, health services provided by doctors).

  • Entertainment costs (even if these are purely for business).

  • Anything purchased from other EU countries (subject to exceptions under the electronic cross-border refund system).

  • Purchases made under one of the VAT margin schemes.

  • Any business assets transferred as a going concern.

  • Purchases before registration - VAT paid on goods or services purchased by a business prior to VAT registered may be reclaimed, subject to certain time limits.

  • Partial exemption - separate records must be kept and calculations must be made by businesses which make both taxable and exempt supplies.

  • Business assets of at least £50,000 - special rules apply in respect of reclaiming VAT on certain expensive items. Individual computers or single pieces of computer equipment, aircraft, ships or boats which cost at least £50,000 before VAT and land and buildings which cost at least £250,000 before VAT. See Capital Goods Scheme rules

The full amount of VAT can be reclaimed on new cars which are used solely for business (Business use does not include travelling between home and business). Used cars must come with a sales invoice which shows details of any VAT, in order to be VAT deductible. 

Commercial vehicles such as vans, lorries and tractors are normally VAT deductible. Cars which are leased for business use are normally 50% VAT deductible. 
VAT can generally be reclaimed on business related vehicle maintenance or running costs (including parking) - even if the vehicle itself is not VAT deductible. There are also various methods of reclaiming VAT for fuel - see Gov.uk for further information.

VAT can typically be reclaimed in respect of travelling expenses (including meals and accommodation) incurred by employees who are on business trips. It cannot be reclaimed in respect of any entertainment costs - or if employees are paid a flat rate for expenses.