Employee Expenses – Can you reclaim VAT on them in the UK?

Your employees incur expenses that de facto are your company's expenses. Some of these expenses include VAT. Can you reclaim it? What situations qualify for this? What evidence do you need to gather for this to succeed? 

When you can reclaim VAT in the UK – general rules

VAT-registered companies can reclaim it on costs incurred in the course of business. VAT cannot be reclaimed on expenses incurred for private purposes or purposes unrelated to commercial activity. The same rule applies as for all tax-deductible expenses:

The expense must be wholly, necessarily and exclusively meaning wholly, necessarily, and exclusively incurred for business purposes.

In the case of expenses incurred by an employee on behalf of the company, they are considered business expenses only if they are essential for the employee to perform their work and only in exceptional circumstances, as detailed below.

You also cannot reclaim VAT on tax-exempt purchases. 

Proof of purchase for goods or services with VAT in the UK

If you want to reclaim VAT on a purchase, you must always provide proof that it was made for your company and in connection with VAT-taxable supplies, i.e., a proper VAT invoice or VAT receipt. However, remember that for a VAT refund to be processed based on a receipt, the seller must be a retail seller and sell directly to an individual, and the purchase amount cannot exceed £250 (including VAT) – as we have already described in this article. Let's recap the essential information that a correctly issued VAT invoice or receipt should contain:

What a VAT invoice should contain

For a VAT invoice to be positively assessed by HMRC for VAT reclaim, it should contain:

·       unique invoice number (this must be a sequential number, i.e., 1, 2, 3…);

·       date of sale of goods/services;

·       invoice issue date (it may happen that you issue the invoice at a later date);

·       name and address of the business selling the goods or services;

·       VAT number (probably the most frequently omitted on all invoices, yet the most important);

·       name and address of the customer purchasing the goods or services;

·       description of the product/service – sufficient for HMRC to identify whether the given product or service is subject to VAT;

·       quantity of the item/service sold, the VAT percentage applied, and the net price;

·       total gross amount;

·       discount amount;

·       VAT amount.

VAT on purchases made by employees

As mentioned above, there are very few situations in which HMRC will accept a purchase made by an employee on behalf of the company as qualifying for VAT reclaim. The general rule is that a VAT invoice should include the name and address of the company for which the purchase is made, not the employee's details.

So, what are these situations and what conditions must be met?

Conditions necessary for reclaiming VAT on employee purchases in the UK

Firstly, you must meet all the general conditions listed below, namely:

1. Provide evidence that your company ultimately bears the full cost of a given expense, even if it was initially incurred by an employee or subcontractor. Ideally, you should provide proof that the company reimbursed the employee who incurred them;

2. Prove that the expense was incurred wholly, necessarily and exclusively i.e., wholly, necessarily, and exclusively for business purposes;

3. The expense should not exceed £25.

However, applying only these guidelines to your situation is not enough.

On the HMRC website, you can find a list of expenses most commonly incurred by employees on behalf of their employer:

1. Road fuel and other motoring expenses – if you use your own car for business purposes, the company can reimburse you based on business mileage (business mileage) according to HMRC rates, but this implies keeping detailed vehicle mileage records;
2. Relocation costs resulting from company relocation or staff transfer – for example, if you want to bring an employee from Poland and pay for their relocation. However, the deductible amount for this cannot exceed £8,000;
3. Various items, such as small tools or materials purchased by an employee at the workplace – for example, printer paper that is essential in the office but has run out;
4. Subsistence costs, such as meals and accommodation, incurred away from the normal place of work, but only if: the meal is not consumed as business entertainment, the employee performs official duties more than five miles from their normal place of work for a period longer than five hours, and the value of the meal does not exceed £25 on a single occasion (more on this here). To ensure such an expense is not questioned by HMRC, it must be incurred during a journey that qualifies as business travel. For example, if a subcontractor employed by a construction company buys food on a construction site, such a cost is not deductible because, in these circumstances, it is their regular place of work. However, if meal expenses are incurred by a person who conducts door-to-door sales and travels across the country for this purpose, their journeys qualify as business travel, and therefore, meal expenses constitute a business cost from which VAT can be recovered. 

Partially Recoverable VAT

If expenses are not entirely related to business activity, VAT cannot be fully recovered from them either.

Example.

If you reimburse an employee the full amount for mobile phone usage, you will only be able to recover VAT for the portion of calls made for business purposes.

The percentage of business use can be calculated in any way, provided the method you apply is fair and reasonable.

Therefore, to summarise:

You can only recover VAT on certain purchases that your employee makes for business use and only in strictly defined situations.

If a purchase is only partially for business use, you can only recover VAT for the portion used in business activity.

To support a claim for VAT recovery on an employee's purchase, you must provide appropriate documentation. If you are claiming partial VAT recovery, you must demonstrate how you calculated the business proportion.

If you happen to recover VAT on the purchase of goods or services that your company did not actually pay for, it must be repaid (clawback). Here you will find an HMRC guide with instructions on how to do this correctly.

More information on VAT refunds can be found at these HMRC links:

VAT Guide (VAT Notice 700);

Charging, recovering, and accounting for VAT.

We have already written about VAT in many of our other articles, a list of which you can find here.