Standard VAT Accounting

Standard VAT accounting means that you pay over to HMRC the difference between the VAT on your sales and the VAT incurred on your costs.

If you are on Cash Accounting for VAT (generally the best option and available whilst sales are less than £1.6 Million), you pay over the VAT already collected on sales from customer receipts and deduct the VAT on costs where you’ve paid your supplier. You work this out in each VAT period, normally each quarter.

If you are on the Invoice basis for accounting for VAT, you have to pay over the output VAT on all sales invoices issued during the VAT period but deduct all input VAT on costs also invoiced in the period (as opposed to the VAT on monies received and spent).

Rules for the Recovery of VAT on Costs

There are general rules and some complex specific rules depending on what you buy.

a) General Rule

The general rule is that you can only deduct “Input” VAT on costs where the cost is “wholly and exclusively” for your business.

This means you cannot recover VAT relating to a non-business or private purpose.

In addition, you cannot recover VAT on costs which relate to making VAT “Exempt” supplies. Exempt supplies are generally supplies of the following goods or services:

  • Land
  • Insurance
  • Postal Services
  • Finance (e.g. Banks)
  • Education
  • Health & Welfare
  • Betting, Gaming & Lotteries
  • Burial & Cremation
  • Trade Unions & Professional Bodies
  • Sports Competitions
  • Works of Art
  • Fund Raising Events for Charities etc.

b) Specific Rules

The majority of businesses make VAT “Taxable Supplies”. Thus, when VAT registered, you can recover from HMRC the VAT you incur on costs. This is the case unless you are using the Flat Rate Scheme for VAT (which has its own rules).

However, the extent to which you can recover Input on your costs depends on what exactly you are buying and the specific rules for that cost.

(i) Postage

Stamps and franking of normal post delivered by the Royal Mail is exempt and so won’t have any VAT added to the cost.

However, parcel delivery and delivery by private companies will have VAT added which you’ll be able to recover.

Always obtain a VAT receipt for VATable costs.

See VAT Notice 700/24 for more information

(ii) Parking

On-street parking operated by a local authority does not have VAT.

However, on or off-street parking operating by a private operator that is VAT registered does have VAT.

Again, always obtain a receipt and see if a VAT number is quoted and /or VAT separately shown.

Parking fines don’t have VAT on them.

(iii) Entertaining

Most entertaining costs will have VAT added but whether you can recover the VAT depends on who is being entertained.

  • UK Customers or UK Actual or Potential Suppliers
    You can never recover any input VAT on entertaining UK customers or suppliers.
  • Overseas Customers or Suppliers
    If however the entertaining is of overseas customers or suppliers, you can recover the VAT. There are though several restrictions on the extent or type of entertaining costs where you can recover the VAT.
    These rules apply to customers or suppliers normally resident outside the UK as opposed just to the entertaining taking place overseas.
  • Staff/Employees
    VAT incurred on entertaining employees, for example a staff party, team building exercises, staff outings and similar events can be recovered in full.
    If the entertaining is just for directors or partners (in a partnership), the VAT cannot be recovered (unless this is at the annual staff party and you don’t have any other employees – though HMRC may take a different view on this).
    See VAT Notice 700/65 for more detailed information about the definition of entertainment etc.

(iv) Subsistence

Provided the subsistence is in connection with business travel, you can claim VAT on subsistence costs for directors and employees.

If you pay for a meal for an employee and customer /supplier in one payment, you must treat the whole as entertaining and not recover any of the VAT, even on the employee’s meal.

You cannot claim VAT back where you pay a flat rate of subsistence costs as opposed to paying against specific invoices.

(v) Car Costs

  • Buying a new car
    You can never recover VAT on the purchase of a car (unless your business is a taxi, driving instructor or self-hire of cars).
  • Leasing/Hiring a car
    You can recover 50% of the VAT on the lease/hire payment where there is any private use (including hope to work travel).
    You can recover 100% of the VAT provided there is no private use of the car whatsoever.
  • Fuel Costs
    There are 3 ways of handling VAT if you use the vehicle for both business and private purposes. You can:

- reclaim all the VAT and pay the right fuel scale charge for your vehicle (see link here to HMRC’s website for more information)
- only reclaim the VAT on fuel you use for business trips - you’ll have to keep detailed mileage records
- choose not to reclaim any VAT, e.g. if your business mileage is so low that the fuel scale charge would be higher than the VAT you can reclaim

If you choose not to reclaim VAT on fuel for one vehicle you can’t reclaim VAT on any fuel for vehicles used by your business.

If your vehicle is used only for business, you can recover all the VAT on fuel costs.

N.B. If fuel costs for cars are put through a company, the person using the car will also suffer a very high personal tax charge for a benefit of private fuel being provided by the employer.

  • Other car costs
    You can usually reclaim the VAT for:
    - all business-related running and maintenance costs, e.g. repairs or off-street parking
    - any accessories you’ve fitted for business use

You can do this even if you can’t reclaim VAT on the purchase of the car itself.

If you buy or lease a car and any car costs are put through a limited company, you will also suffer high personal tax on the taxable benefit in kind of being provided with a car which is available for private use.

See VAT Notice 700/64 for more information on car costs

(vi) Mixed Business and Private use

If a purchase is also for personal or private use, you can only reclaim the business proportion of the VAT.

Examples
  • Half of your mobile phone calls are private. You can reclaim 50% of the VAT on the purchase price and the service plan.
  • You work from home and your office takes up 20% of the floor space in your house. You can reclaim 20% of the VAT on your utility bills.

(vii) Items bought from another EU country

You cannot reclaim the VAT suffered on the cost of items bought from other EU countries.

However, you may be able to reclaim VAT charged under the electronic cross-border refund system (see link here to HMRC’s website for more information). The form filling procedure is quite time consuming but the VAT at stake may make it worthwhile pursuing this route to get back the VAT suffered.

Practical Matters

Your bookkeeping system must be set up correctly to show that you are on Standard (not Flat Rate Scheme) accounting for VAT.

It is also vital that where VAT is recovered in full, you show VAT correctly and also that the net of VAT cost is shown correctly in the appropriate cost heading.

Similarly, if you cannot recover all or any of the VAT, because say it arose on UK entertaining, you don’t show any VAT in the record keeping and also show the entertaining cost with all the VAT included.

If you want any help getting the VAT and the bookkeeping right, do call us. You won’t want a subsequent VAT visit to identify mistakes which in turn result in penalties and interest.

This fact sheet is for information only. It provides an overview of the regulations currently in force and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore, no responsibility for loss occasioned by any person or refraining from action as a result of this material can be accepted by the authors or the firm.