Top 10 items to recover VAT on as a limited company IT contractor
Let’s face it, any contractor who is VAT-registered will want to claim everything they are entitled to (or at least they should!), despite the inevitable presence of a few grey areas, writes Christian Hickmott of Integro Accounting.
Recovering VAT as a contractor: an introduction
The more clued up you are on what you can legitimately put through, the clearer VAT returns will be.
And anything that makes the process more efficient, and less likely to land you a HMRC penalty, has got to be a good thing!
So as many contractors often ask us, when is VAT recoverable and when is VAT not recoverable through your own limited company?
Why is VAT charged and what are the thresholds?
VAT is an indirect tax that businesses collect on behalf of the government i.e. companies charge VAT on goods and services and that VAT is paid to HMRC.
You’ll need to register for VAT if your taxable turnover exceeds £85,000 (the current threshold) in a 12 month period. Registration must take place within 30 days of the end of the month during which the threshold was exceeded.
There is an exception to this. Should you believe exceeding the threshold was only temporary and is unlikely to happen again, you can apply to HMRC explaining why you have gone over the threshold and why it is a unique event. They will review your application but if it is declined due to lack of substantiating evidence, you will still need to register.
There are three different rates of VAT: Standard Rate (currently 20%), Reduced Rate (currently 5%) and Zero Rate. There are also some items that will be exempt from VAT.
It’s worth noting here that VAT in the hospitality and tourism sector has temporarily been reduced to 5% due to the economic impact of Covid-19. This will remain in place until September 2021 at which point it will rise to 12.5% for six months before returning to the standard 20% rate in April 2022.
What is the benefit of being VAT registered?
Actually, there’s a number of benefits to your business being VAT registered:
- You can reclaim VAT on your expenses (most goods and expenses purchased from other businesses);
- It may work to your advantage by making your business look more credible in the eyes of large companies, putting you on an equal footing;
- Providing you have evidence, you can reclaim VAT on goods (up to four years) and services (up to six years) prior to your company’s registration on business expenses. But note, these can only be applied to your company’s first VAT return.
What are the 10 most common items that contractors can recover VAT on?
- Accountancy fees
Your business will undoubtedly incur accountancy fees. These are a legitimate expense and any VAT charged can be recovered.
- Computer costs
Not just the physical items themselves (hardware), but also computer programmes (software) like ubiquitous ADOBE and Microsoft tools.
- Internet and telephone costs
As long as you have a separate broadband and/or phone line you can reclaim 100% of the related VAT. However, if you have one connection for both your business and private use you’ll only be able to reclaim a percentage of the VAT based on how much is used for business.
You can reclaim VAT on hotel accommodation when you are away on business.
- Meals and coffees
Subsistence, necessary during the course of business and only when you’re away from your normal business premises, can be reclaimed at 5% VAT (due to the temporary changes announced as a result of Covid-19).
Any VAT charged can be recovered on stationery items purchased for your business.
- Advertising and promotions
You can reclaim VAT on your marketing costs for your business including advertising, promotions and product samples.
- Motor expenses
For any vehicle used exclusively for business, all VAT is reclaimable. If it is used for both business and personal use, then you can claim up to 50%.
- Legal and professional fees
Any legal or professional costs relating to your business allow you to recover the VAT.
- Consultancy fees
Independent advisors can charge employers VAT when levying a consultancy charge.
What items are exempt from VAT?
- Formation cost
This may seem like an obvious exemption, but many people think this charge by Companies House is claimable on VAT. It isn’t!
Insurance transactions are exempt from VAT, therefore there is nothing to reclaim.
However relevant to your business in terms of being educational, books are non VAT-able and therefore there is no VAT to reclaim.
The payment of pensions and receipt of contributions are exempt.
As you do not pay VAT on train, bus and air fares, there is nothing to reclaim. There is tax on flights but nearly all travel is VAT exempt.
These are just some of the more common examples of what you can and cannot reclaim VAT on. There will obviously be other less clear-cut items (those grey areas!) and these will need to be queried with an accountant for a definitive answer of ‘claimable,’ or ‘non-claimable.’ It is always better to be on the safe side rather than trying to put anything through that could be rejected, and then arouse HMRC’s suspicions!
What do you need to keep to claim back VAT?
You guessed it; it all comes down to keeping good records!
So you’ll need VAT invoices showing all the information that is required by law. You’ll also need receipts for smaller expenses such as petrol, cafes and the like The only exception being for purchases under £25, when you can reclaim the VAT without a receipt, providing of course the supplier is VAT-registered.
There will be rare occasions where receipts aren’t available and that doesn’t automatically mean you won’t be able to claim the VAT, but you will need to meet other criteria set out by HMRC. For example, evidence such as a supplier statement. So, it is advisable to try and obtain a full VAT invoice wherever possible -- it will invariably make your life easier in the long run, and give you peace of mind in the short-term.
By developing a good understanding of what you can and cannot reclaim VAT on, and by knowing where to find and record the relevant information, your VAT returns should become straightforward, meaning more time and willpower to eliminate those grey areas if they do crop up!