Reclaiming VAT on workers’ expenses
The right paperwork
We don’t need to tell you that the Taxman can be a stickler for the rules. And if you’ve been at the sharp end of a VAT inspection you’ll know that he has an uncanny knack of spotting discrepancies. For example, having an invoice showing that your business paid VAT on a purchase doesn’t automatically entitle you to reclaim it, especially where it relates to a transaction involving someone who works for you.
Who’s receiving the supply - part 1?
Whilst having the right paperwork, i.e. invoices and receipts, is essential, you can only reclaim VAT where the goods or services supplied were for use by your business. For example, where a company pays a personal bill for one of its directors, say, for having their house painted, it’s the director who has received the supply and not the business. Therefore, even where the bill is in the company’s name it can’t reclaim the VAT. But where the director doesn’t reimburse the company for the expense, the position is more tricky.
Employee benefits
Whereyour business pays a personal expense for an employee or director but doesn’t pass the cost on to them, this counts as a (BiK), i.e. part of their remuneration package. The cost of providing a BiK is clearly a business expense and so you might think you can reclaim the VAT on its cost. You would be right, but the trouble is that providing a BiK to your workers is, subject to some exceptions, a VATable supply (see The next step). This means you would have to account for VAT on it. The net result is that the VAT you reclaimed would be cancelled out by that payable on the supply to your employee, unless of course you made them pay for this.
Tip. VAT doesn’t have to be paid on certain BiKs, even where you’ve reclaimed VAT on their cost (see The next step).
Who’s receiving the supply - part 2?
VATable supplies work both ways. Where an employee buys something that’s used by your business, you have the right to reclaim the VAT on the cost. For example, a site worker might purchase small items of equipment to use while away on a job. Where he pays for these from his own funds, it’s likely the invoices or receipts will be in his name, but actually the supply is for your business. As long as you reimburse him for the expense you can reclaim the VAT. Where the expense is for a mixed personal and business supply, say a director’s mobile telephone bill, you must work out by a fair and reasonable method the business-related VAT and only reclaim this proportion.
Trap. An employee’s expenses claim for reimbursement of costs isn’t sufficient evidence to support a claim for VAT. The Taxman expects you to have the corresponding invoice or receipt even where this is in the employee’s name.
Tip. The right to reclaim VAT on expenses paid by workers can also apply where they are a contractor rather than an employee. However, more conditions apply in this situation (see The next step).
For information on VAT and benefits (TX 12.02.06A), for the conditions on contractors expenses (TX 12.02.06B) and for details of VAT exceptions (TX 12.02.06C), visit http://tax.indicator.co.uk.
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