Going VAT registered can be a complex minefield to navigate. If you are VAT registered it’s important that you abide by the rules set out by HMRC when it comes to reclaiming your VAT.
As a VAT registered business you must charge VAT on your invoices (depending on the type of goods or services) in order to pay this amount to HMRC.
The good thing about being VAT registered is that you can claim back any VAT on costs incurred to your business. For example if your supplier charges you VAT you can claim this cost back against your VAT bill. The more VAT you pay out the less your VAT bill will be.
Purchases before registration
When you first become VAT registered you can reclaim the VAT paid on goods or services purchased before you become VAT registered. You can claim back the cost of any goods which you have purchased up to 4 years before becoming registered providing they are still in use within your business and you have proof of purchase.
For any services purchased you can only claim for the 6 months previous to becoming VAT registered.
Anything which you reclaim the cost of VAT for must be for business use. Anything you’ve purchased for personal use is not eligible to be reclaimed.
Eligibility on VAT reclaim
If you’re a Limited Company it’s important that all invoices are addressed to the business and not an individual director.
A tax invoice is supposed to show the person to whom the goods or services are supplied. So, if an invoice is not in the name of the business, it can mean that the supply was not made to that business. If the invoice is addressed to a director for example, then the business has to prove it is a business expense to make the claim so it’s just simpler to ensure everything is in the company name in the first place!
When it comes to claiming back VAT, any invoice over the value of £250 should be made out to the business name to be claimed as a legitimate business expense, The one common exception to that requirement is expenses incurred by employees. Whilst it is always a good idea to obtain an invoice addressed to the employer if possible for, say, hotel accommodation, HMRC do not insist on this. These costs are normally paid to the employee through an expenses claim, and HMRC accept that if the business is prepared to authorise payment of these costs they are legitimate business expenses and allow VAT to be reclaimed, even though the invoice is addressed to an employee rather than the business.
It is always better to get an invoice addressed to your business where possible to avoid questions from HMRC inspectors when they check your records.
Alternatively, if this cannot be avoided, such as a phone bill which is in mid contract, then it should be paid for personally and reclaimed through expenses, this way the VAT can be reclaimed. If you were to ever have a VAT inspection these things would be looked at in depth, so it’s important you’re following the rules.
Flat Rate Scheme
If you use the VAT Flat rate scheme then you are unable to claim VAT back on your purchases, with the exception of certain capital assets over £2k.
Business Assets
For business assets which have a value of £50,000 or more there are special rules for reclaiming the VAT in the Capital Goods Scheme. In these circumstances HMRC makes you spread the cost of the VAT claim over a number of years.
As you can see there are lots of factors which can make your VAT reclaim confusing, so it’s always best to seek our advice. Looking after VAT registered, serviced based, limited companies is our area of expertise, so let’s have a chat!