Reclaiming VAT: What Can’t You Claim?

Many VAT registered businesses try to claim back all their expenses. Unfortunately, reclaiming VAT isn’t that simple. Let’s run through what you can’t reclaim.

Three wooden blocks are stacked to spell the word VAT. Out of focus, behind the blocks, a cute ceramic piggy bank sits on top of some scattered documents. the image represents reclaiming VAT.
Reclaiming VAT

(3 minute read)

Today we’ll be discussing:

  • VAT incurred overseas
  • Blocked input VAT
  • VAT on exempt supplies
  • VAT on private expenditure

VAT Incurred Overseas

Businesses with overseas dealings generally face more complex taxes because you must understand how domestic and foreign tax rules interact.

However, to simplify, VAT you incur overseas is non-deductible.

Most of the time.

There are cases where you may be able to reclaim VAT from the foreign tax authority, but you can’t reclaim it from the UK. For example, if you incur VAT in Germany, you can reclaim it from the German tax authority.

Different countries have different VAT systems (some have no VAT systems) and there are companies who specialise in helping businesses make claims.

Blocked Input VAT

Blocked input VAT refers to VAT on specific types of expenditure that HMRC do not allow you to reclaim.

The list includes:

  • Cars
  • Some building materials
  • Business entertainment (unless for overseas clients)
  • Domestic accommodation

There may be some circumstances in which these items aren’t blocked, however, these are very specific.

For example, reclaiming VAT on cars is possible if your business is a driving school, taxi service or car dealership or if you can prove that it is only possible to use the car for business purposes.

Reclaiming VAT on Exempt Supplies

An exempt supply is not subject to VAT, but related expenses are. As a result, you can’t reclaim VAT on expenses related to an exempt supply.

Business owners often make mistakes when identifying exempt supplies, which can lead to complications when reclaiming VAT. Always be sure to double-check if you’re unsure, or have an expert manage VAT for you.

Reclaiming VAT on Private Expenditure

You cannot reclaim VAT on private (non-business) expenditure. If the spending is mixed-use, partly business and partly private, you can reclaim VAT on the business portion.

For example, if your purchase is used 70% for business and 30% privately, you can reclaim 70% of the VAT. However, you should be able to prove that the portion of spending is business-related.

If reclaiming VAT on something that you later use for private purposes, you will have to pay an output tax.

For capital items, for example buildings, input tax is worked out via the Capital Goods Scheme. This means that the purpose of the asset is assessed over a period of years and this assessment dictates the VAT due.

What Now?

If all these limitations have you worrying that you might have made a mistake on a recent VAT return, check out our article on how to correct VAT errors.

Call us today at 01772 788200 to find out more, or WhatsApp us out-of-hours at 07787 010190. Sending an e-mail is simple too, just fill out the short form below and we’ll get back to you!

Kind regards Ilyas