VAT on Staff Expenses – what is claimable?
Although the VAT rules normally prevent a business reclaiming input tax on supplies that are not made directly to it, there are certain circumstances when the rules are relaxed. Although rather a dry and basic area, experience insists that it creates many issues at inspections and is “low hanging fruit” for which HMRC may levy penalties. Some business decide not to recover VAT on such costs to avoid problems, but certain claims are permissible and may be worth significant sums if they have a number of employees.
For instance, the VAT element of subsistence expenses paid to your employees may be treated as input tax. In order to qualify for this concession, employees must be reimbursed for their actual expenditure and not merely receive round sum allowances. These costs include hotels and meals.
VAT invoices (which may be made out to the employee) must also be obtained. The rule of thumb is that the employee must be more than five miles away from their place of employment and spend over five hours there (the so-called 5 mile/5 hour rule). A business cannot reclaim input tax if it pays an employees a flat rate for expenses.
Reimbursement for Road Fuel
The VAT legislation permits a business to treat as its own supply road fuel which is purchased by a non-taxable person whom it then pay for the actual cost of the fuel (usually through an expenses claim). This would therefore allow a business to recover input tax when it reimburses its employees for the cost of road fuel used in carrying out their employment duties.
A business is able to reclaim all the input tax on fuel if a vehicle is used only for business. There are three ways of claiming VAT if a business uses a vehicle for both business and private purposes.
- reclaim all the VAT and pay the fuel scale charge – HMRC details here
- only reclaim the VAT on fuel you use for business trips – this requires the retention of detailed mileage records
- choose not to reclaim any VAT eg; if your business mileage is so low that the fuel scale charge would be higher than the VAT you can reclaim
If a business chooses not to reclaim VAT on fuel for one vehicle it cannot reclaim VAT on any fuel for vehicles used in the business.
The legislation also enables you to reclaim the VAT element (or a reasonable approximation) of mileage allowances paid to employees.
For details of this complex area please see here
Certain goods which are to be used in a business, eg; office supplies, the business may reclaim the input tax on purchases made by employees or directors. In all cases you’ll need a VAT invoice. Details required on a VAT invoice here
An element of mobile phone costs may be recovered. The VAT on the business use of the phone may be recovered, eg; if half of the mobile phone calls are private 50% of the VAT on the purchase price and the service plan can be recovered.
Work from home
If a person works from home an element of the costs may be recovered. As an example: if an office takes up 20% of the floor space in a house. A business may reclaim 20% of the VAT on utility bills.
A business must keep all records to support a claim and show how it arrived at the business proportion of a purchase of goods or services and it must also have valid VAT invoices in all cases.