Value Added Tax (VAT) is a tax that businesses in the UK must pay when they purchase goods or services. The VAT paid on these expenses can be claimed back, which is known as a VAT refund.
Our accountants are well-versed in VAT, and so they have put together this article that will explore how businesses can claim VAT refunds on their expenses.
What is VAT?
Value Added Tax (VAT) is a tax that is charged on the sale of goods and services in the UK. It is a tax that is added to the price of goods and services and is paid by the customer. The business selling the goods or services is responsible for collecting the VAT and passing it on to the government.
VAT is charged at different rates depending on the type of goods or services being sold. The standard rate of VAT is 20%, but there are also reduced rates of 5% and 0% for certain goods and services. Some goods and services are also exempt from VAT.
How does VAT affect business expenses?
When a business purchases goods or services, it will usually be charged VAT. This VAT is an expense for the business, and it will increase the overall cost of the purchase. However, businesses can usually claim back the VAT they have paid on their expenses.
Claiming VAT refunds on business expenses
In order to claim a VAT refund, a business must be registered for VAT. If a business is not registered for VAT, it cannot claim back any VAT it has paid.
Once a business is registered for VAT, it can claim back the VAT it has paid on its expenses by including it in its VAT return. The VAT return is a form that businesses must submit to HMRC every quarter.
The VAT return shows how much VAT the business has charged on its sales and how much VAT it has paid on its expenses. If the business has paid more VAT than it has charged, it will be entitled to a VAT refund.
What expenses can be claimed?
Most expenses that are incurred for business purposes can be claimed back as VAT. This includes expenses such as:
- Office supplies and equipment
- Rent and utilities for business premises
- Business travel expenses
- Professional fees, such as legal and accounting fees
- Advertising and marketing expenses
- Training and conference fees
There are some expenses that cannot be claimed back as VAT, such as entertainment expenses and expenses that are not related to the business.
How to calculate the VAT refund
In order to calculate the VAT refund, a business must subtract the VAT it has charged on its sales from the VAT it has paid on its expenses. If the result is a negative number, the business is entitled to a VAT refund.
For example, if a business has charged £10,000 in VAT on its sales in a quarter and has paid £8,000 in VAT on its expenses, it will have a VAT liability of £2,000. However, if the business has charged £10,000 in VAT on its sales in a quarter and has paid £12,000 in VAT on its expenses, it will have a VAT refund of £2,000.
Timing of VAT refunds
VAT refunds are usually paid by HMRC within 30 days of the VAT return being submitted. However, it can take longer if the VAT return is incomplete or if there are any errors or discrepancies.
Bear in mind that businesses can only claim back VAT on expenses that were incurred within the previous four years. This means that if a business has not claimed back VAT on an expense within four years of the date it was incurred, it will not be able to claim it back.
Are you owed a VAT refund?
Claiming VAT refunds on business expenses is an important process for businesses in the UK. By claiming back the VAT they have paid on their expenses, businesses can reduce theirs and improve their cash flow.
To claim a VAT refund, a business must be registered for VAT and include the VAT they have paid on their expenses in their VAT return. Most business expenses can be claimed back as VAT, but there are some exceptions, such as entertainment expenses.
Frequently asked questions about claiming VAT back
If you would like to learn more about claiming VAT expenses check our FAQs below or contact us today:
Do you need a VAT receipt to claim expenses?
Yes, you’ll need to keep hold of your receipts if you want to claim any expenses back. You need to provide some form of evidence that you’ve charged VAT and that must connect with a VAT number. Without this, there’s no evidence that tax has been paid, and therefore, you won’t be able to claim expenses.
What is the 4-year rule for VAT reclaim?
The 4-year rule for VAT reclaim essentially means that you’ve got up to 4 years to claim back any VAT refunds. This begins from the due date of the VAT return that you would be making a claim on instead of the date found on the VAT invoice.
Can I claim VAT back if my turnover is under £85,000?
Yes, you can – although you’ll need to be VAT registered first. This is known as voluntary registration, and you’ll have to pay HMRC any owed VAT from the date that you become registered. However, if the goods you sell are VAT-exempt, then you won’t have to be VAT registered in the first place.