How can I reclaim VAT?

VAT-registered businesses usually collect VAT from customers on their taxable sales and may be able to recover VAT incurred on qualifying business purchases and expenses.

Not all VAT incurred on purchases can be reclaimed, so it is important to check that the expense qualifies for VAT recovery before including it on a VAT Return.

You can usually reclaim VAT only if your business is VAT registered and the cost relates to your taxable business activities.

Taxable supplies include standard-rated, reduced-rated and zero-rated supplies. If your business makes exempt supplies, you may not be able to reclaim all the VAT you incur, and partial exemption rules may apply.

To support a VAT reclaim, you should keep valid VAT invoices or other acceptable VAT evidence issued by a VAT-registered supplier.

VAT cannot normally be reclaimed on costs that:

• are for private or non-business use
• relate only to exempt supplies
• are for business entertainment
• relate to the purchase of a car, except in limited circumstances where the car is used only for business.

If you use the VAT Flat Rate Scheme, you cannot usually reclaim VAT on purchases. The main exception is for certain capital assets costing more than £2,000 including VAT.

Most organisations are now required to use Making Tax Digital (MTD)-compatible accounting software to file VAT returns. This type of software will usually calculate your recoverable input VAT automatically from the purchases and expenses recorded during the VAT period.

Before submitting your VAT Return, check that only qualifying VAT has been included.

The recoverable VAT is reported in Box 4 of the VAT Return. HMRC then offsets this against the VAT due on your sales:

VAT due on sales (Box 1)
               less
recoverable VAT on purchases (Box 4)
               equals
amount payable to, or reclaimable from, HMRC

If the amount in Box 4 exceeds the VAT due in Box 1, HMRC will normally issue a VAT repayment.

The VAT treatment of vehicles and fuel is subject to special HMRC rules, and the amount you can reclaim depends on the type of vehicle and how it is used.

If you reclaim VAT on a vehicle purchase, remember that VAT may also be due when the vehicle is later sold.

Read more: Reclaiming VAT on vehicles and fuel

Businesses can often reclaim VAT on qualifying employee travel expenses where employees have incurred costs on business journeys and the business reimburses the actual amount spent.

Examples may include:

• fuel used for business travel
• hotel accommodation
• meals incurred during qualifying business travel.

To reclaim VAT, the business should retain appropriate VAT receipts or other acceptable VAT evidence.

You cannot normally reclaim VAT on flat-rate expense payments, mileage allowances or other round-sum reimbursements because these payments do not identify a specific amount of VAT that has been charged.

The general rule is that VAT may be reclaimed on:

• goods purchased up to four years before VAT registration; and
• services purchased up to six months before VAT registration.

For goods to qualify, they must:

• have been purchased by the business that is now VAT registered
• be used for taxable (rather than exempt) business purposes
• still be held by the business, or have been used to make other goods that are still held.

Examples include office equipment and goods purchased for resale.

For services to qualify, they must:

• have been purchased by the business that is now VAT registered; and
• relate to taxable (rather than exempt) business activities.

Examples include legal and accountancy services.