A lot of people are looking for ways to pay less VAT. Well, you can’t reduce the total VAT amount liable when you charge VAT but you can optimize the total amount of VAT recovered. As much as you can claim input VAT under the law, you need to consider where VAT can’t be recovered. That’s because it is blocked but you need to make the right arrangements for it.
During VAT audits, the HMRC often targets any input VAT that has been claimed incorrectly in the return. If you make exempt VAT supplies, you should be aware of the VAT implications. However, any irrecoverable costs might end up being a huge issue for fully taxable businesses in the long run. Note that, there are some costs where you can’t reclaim VAT, regardless of whether your business sells VAT exempt or standard rate goods or services.
There are some circumstances where there are irrecoverable VAT costs but they are liable because the conditions required to avoid these VAT charges were not complied with. Here are 5 common problems that VATGlobal say most businesses suffer when declaring VAT.
- Business Entertainment
Any VAT incurred on business entertainment for UK costumers should not be recovered. Business entertainment costs include hospitality services such as food, accommodation, drinks, theatre tickets, sporting events, concerts and much more.
You can claim VAT on staff entertainment or any business entertainment provided to overseas customers but it must be reasonable. That’s why it’s prudent to retain enough supporting documents on the type of entertainment provided to avoid any unnecessary investigations by HMRC.
- Car Costs
There are some complex rules regarding VAT on any car expenses. For instance, you can’t recover any VAT from purchasing a car but there are some exceptions in this case. If you purchase a driving instruction car, taxis or self-drive hire cars, you can claim the VAT on them because they are not for private use.
For a business that leases vehicles for business use, then 50% of the VAT charged can be recovered. Other complex rules involve the motoring expenses such as repairs, fueling or private use charges. It’s very easy to make errors when filing your VAT returns. Therefore, seek information from financial advisors or accountants to avoid costly mistakes.
- Non – Business Costs
You can only recover VAT on costs incurred for your business. Sometimes, the business can choose to pay for non-business expenses such as domestic accommodation, company directors’ expenses such as personalized number plates or sporting activities. You shouldn’t reclaim VAT on these costs.
- Third-Party Costs
There are a few cases where a business might choose to pay someone else’s costs. For instance, they might choose to pay the legal fees for the losing party after a litigation. Also, they might choose to pay the landlord’s costs incurred by a tenant or the repair costs for a third party’s property damage.
Here, the business isn’t liable to recover the VAT charges because they didn’t incur the costs while doing regular business work such as supplying goods or services. Any claim in this case would be rejected and would raise eyebrows especially during an audit.
- VAT Incurred On Acquisitions
Any UK business registered for VAT shouldn’t be charged foreign VAT by another supplier, especially after acquiring goods from another country in the EU. However, the supplier needs to obtain the VAT number of the UK business and show it on the invoice. If that doesn’t happen, the supplier needs to charge VAT.
If you want to avoid any irrecoverable VAT on any overseas costs, make sure the purchases are linked by the identifiable VAT number. The supplier needs to use the legitimate VAT number for the best results.
In conclusion, VAT costs are usually complex. If you don’t have a good understanding of the returns and what to claim, it’s always a good idea to hire a bookkeeper or accountant for the job.