VAT reclaim: Busting the four big myths

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    Francois Badenhorst

    Francois Badenhorst Business Editor, UKBF & AWEB Staff Member

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    VAT, in particular, seems to inspire its share of myths. It's not surprising, the tax is a uniquely byzantine one.

    But the good thing about myths, especially pernicious ones, is they're b.s. Turns out you could be losing out on easy money. UKBF spoke to Neil Warren, an independent VAT expert and author, to bust some enduring VAT myths.  

    VAT reclaim myth #1: Reclaiming VAT on mileage isn’t worth the effort

    The amounts seem small, but it all adds to your bottom line, explains Warren. “It’s definitely worth the effort.”

    Let’s look at fuel. When a business pays 45p per mile for an employee using a car for a business journey, you can reclaim VAT on the road fuel element. For a two-litre car or greater, the road fuel element of the 45p payment is 22p, so the VAT to claim is 3.67p per mile ie 22p x 1/6 (the VAT fraction). 

    “So if a business car does 20,000 business miles in a year, the VAT reclaim is £733 pounds,” says Warren. That's 20,000 miles x 22p x 1/6 = £733. “If you’ve got ten cars doing, with sales reps doing trips around the country, there’s around £7,500 to be had.”

    For smaller cars, less than 1400cc, you can reclaim 11p per mile, and for cars between 1400 and 2000cc, you’re looking at 14p per mile.

    The key thing is: retain your petrol receipts. “Your staff need to be methodical,” says Warren. It won’t be absolutely flawless, but a good rule of thumb is the amount of VAT you reclaim should be less than the total of the receipts. “That’s because there’s likely to have been a few private journeys, too”

    VAT reclaim myth #2: You can reclaim VAT on all travel expenses

    To riff on the classic 80s buddy comedy, you can’t reclaim on trains or planes, but automobiles are almost always fine, according to Warren: “The official guidance is any form of transport with more than ten people is zero-rated”. So buses, boats and ships are out, too.

    Most taxi drivers aren’t VAT registered, so the majority of taxi receipts can’t be reclaimed. But other expenses like fuel and car hire fees get the green light.

    Where you might be letting some money slip through the cracks is foreign VAT reclaim. As Brendin Cohen of VAT IT explains: “We can recover from all 28 member states. Obviously each VAT authority applies the rules differently, but generally speaking, we can reclaim any travel and entertainment cost that’s incurred while travelling abroad within the EU.”

    VAT reclaim myth #3: Dealing with HMRC is too complicated

    When it comes to HMRC, VAT on travel expenses and living cost are a low-risk area. “What you have to recognise is there’s a lot less compliance work being done by HMRC,” says Warren. “That doesn’t mean you have carte blanche.”

    When it comes to compliance work now, HMRC focuses on the risk areas of VAT: partial exemption, large capital expenditures, land and property.

    So if the Revenue comes knocking, the main thing they look at is your system. “The way the employees put their claims in, who authorises it, are the employees only claiming for business journeys,” says Warren. “Keep the petrol receipts, record the journeys properly, get the employees organised then it’s very low risk.”

    And consider technology, says Tim Page, a senior director at Concur, an expenses software. “A spreadsheet doesn’t quite capture the nuances of UK VAT law. “SMEs don’t have the manpower to stay on top of all of it. There are tweaks to rates, things like hot and cold food, additional red tape.”

    A tech solution automates incorporating all these rules, easing the burden.

    VAT reclaim myth #4: You must have original paper receipts to meet HMRC requirements

    There’s a misunderstanding that you must have the original tax invoice to support an input tax claim. While that’s ideal, there can be cases where you’ve incurred an expense and forgot to get the invoice or the receipt.

    “Regulation 29 of the VAT regulations say HMRC can accept alternative evidence to support an input tax claim as they instruct,” explains Warren.

    “In the input tax policy manual, policy number 31200, they give a list of criteria of things they want you to prove or show in the absence of an invoice. Things like how you paid the bill, copy of an order form, evidence of what it relates to as far as your business is concerned.

    “With most travel expenses, if the expense is less than £250 including VAT, you can use a less detailed tax invoice which doesn’t have to show the full details as long as it shows the VAT rate, what the goods are for and the VAT number of the supplier.”

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  2. scstock

    scstock UKBF Contributor Free Member

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    Really interesting article, but why on earth should you need to keep fuel receipts from your employees for fuel that they have purchased when you are keeping records - dates, locations, distance - of the journeys undertaken by them for business? If HMRC are allowing a flat rate of 0.45p/mile I just don't see how a receipt from Tesco for £61.87 relates.
     
    Posted: Apr 6, 2018 By: scstock Member since: Mar 27, 2009
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    dharmapatel and The Byre like this.