VAT on Business Expenses: What You Can Reclaim

Once you are VAT registered, the VAT you pay on business purchases is not always lost money. In many cases you can reclaim it as input tax on your VAT return. But the rules are strict, and some of the most common purchases are blocked or restricted. Here is a practical guide to what you can usually reclaim, what you cannot, and how to stay on the right side of HMRC.

Key takeaways

• You can generally reclaim VAT on purchases used for your VAT-taxable business, if you hold a valid VAT invoice.
• Business entertainment and most cars are common blocked or restricted areas.
• Mixed business and private use means you reclaim only the business share.
• If you use the Flat Rate Scheme, you usually cannot reclaim most purchase VAT.

What input VAT is

VAT you charge your customers is called output VAT. VAT you pay on your own business purchases is called input VAT. On a standard VAT return you pay HMRC the difference, so reclaiming input VAT reduces what you owe, or may produce a refund. To claim it, the purchase must be for your business, you must be VAT registered at the time, and you should normally hold a valid VAT invoice. The official overview is on GOV.UK's VAT guidance for businesses. If you are still deciding on registration, see our guide to the VAT registration threshold.

What you can usually reclaim

Mixed-use and partly private costs

When something is used for both business and private purposes, you can only reclaim the VAT that relates to the business share. A phone, a vehicle or a home-office expense are typical examples. Choose a reasonable method, apply it consistently and keep a note of how you worked it out. Claiming 100% of something that is clearly part private is an easy way to attract HMRC's attention. A good bookkeeping routine helps here, which is why we cover the topic in our guide to bookkeeping for a VAT-registered business.

Time limits and evidence

You normally need a valid VAT invoice, or the right evidence for small purchases, and you must reclaim within the time limits that HMRC sets. Keep invoices in a way that you can retrieve them, and match them to the right VAT period. VAT records for businesses must be kept digitally for the period HMRC requires, so check the current record-keeping rules on GOV.UK's VAT record keeping guidance. Using compatible software makes this much easier.

Worked example (illustrative)

"Nadia", an illustrative example, runs a VAT-registered cleaning business on standard VAT accounting. In one quarter she buys cleaning equipment, pays her accountant, and renews a phone contract that she also uses personally. She reclaims the VAT on the equipment and the accountancy fee in full, and only the business share of the phone VAT. She also takes a client for lunch, but leaves out the VAT on that because entertainment is blocked. She keeps every invoice against the right quarter and submits her return on time. The numbers are deliberately omitted because this scenario is invented to show which claims go in and which stay out. If she had been on the Flat Rate Scheme, most of these claims would not apply, as explained in our guide to flat rate vs standard VAT.

Common mistakes

• Reclaiming without a valid invoice. Without evidence, HMRC can disallow the claim.
• Claiming blocked items. Entertainment and most cars are the classic examples.
• Claiming 100% of mixed-use costs. Only the business share is reclaimable.
• Putting claims in the wrong period. Match each invoice to the correct VAT return.
• Ignoring the scheme you are on. Flat Rate Scheme users usually cannot reclaim most purchase VAT.

If you want your VAT claims checked before you file, our VAT returns service can help, and you can contact us with any questions.