What IT contractors can & can't recover VAT on
Despite being around for 40 years, Value Added Tax is still stumping the smallest firms such as one-person limited companies, particularly when it comes to what they can and can’t reclaim VAT on, writes Julie Park, managing director of The VAT Consultancy.
Here, exclusively for ContractorUK, I explore the items common to IT contractors that are VAT reclaimable. I will also spell out a basic rule for these one-person companies to use when they are unsure about when VAT can be recovered on contractor expenses, and will consider how to maximise what can be a significant cash saving.
The Basic Rule
In short, the rule is that the majority of the VAT you incur on business expenses and other costs as a VAT-registered contractor is fully recoverable.
So VAT can be reclaimed in full on costs incurred 100% for business purposes and paid for by the business. This includes costs you incur, such as from training courses or from purchasing software, which arise because they enable you to provide your services more effectively.
If costs are incurred partly for private and partly for business purposes (see the subsequent section on Working from Home), part of the VAT can be claimed. Bear in mind though, VAT can only be claimed if you have a VAT invoice showing the requisite details including the business name among other details.
Business Vs Private Use
If you work from home it is likely you will have expenses with mixed use. You can use any reasonable method to apportion VAT recovery. For example, if you work from home and have a single telephone line used for both purposes, as opposed to a separate business line, you should determine what would be a reasonable way of working out what percentage of calls are business calls. A starting point would be an itemised phone bill, and you could reasonably take the view that all calls made Monday to Friday during working hours are business calls, and the VAT on this proportion of the total would be recoverable.
Working from Home
If you work from an office at home, it is acceptable to claim some of the VAT incurred on utility costs on the basis they feed your home office. Again a reasonable business proportion should be determined and this percentage of the VAT claimed. It would be advisable to notify HM Revenue & Customs in writing of your proposed apportionment approach for VAT on mixed expenses to avoid the risk of them disagreeing with your methodology at a later date.
It is fair to say that the VAT rules relating to travel expenses are complex. On the one hand, the position relating to flights and trains is simple – no VAT is incurred. VAT can also be claimed on subsistence costs i.e. food/drinks. However on the other hand, the rules for car-related expenses are less straightforward:
The bottom line with fuel is that there are choices depending on how fuel is paid for by the business. The three most commonly used methods are:
- Paying yourself a mileage rate (e.g. 45p per mile) to cover fuel and other motoring costs, part of the mileage rate (approx. 18p) is deemed to relate to the fuel element and you can recover VAT from this amount (using the VAT fraction). Receipts must be retained although they won’t match the mileage claims as the tank will have been used for private purposes too
- Where the business pays for business and private mileage, payment of a fixed fuel scale charge to HMRC, allowing you to claim VAT on all fuel purchased by the business without the need to keep detailed business mileage records. This method is low maintenance and cost effective if you incur lots of mileage - the point being the VAT you reclaim on fuel should by far exceed the fuel scale charge you pay to HMRC
- Keeping a detailed mileage log or record to show all business and private mileage undertaken, with VAT being recovered on the business element.
VAT cannot be recovered at all on the purchase of a car by a business, even if it is used partly for business purposes. However if you lease a car, all of the VAT incurred can be recovered UNLESS the vehicle is hired for more than 5 days (indicating likely private use at weekends), in which case only 50% of the leasing charge can be recovered (VAT on the maintenance element can be fully claimed).
If your contract takes you overseas, it is likely you will incur overseas VAT on costs. This cannot be claimed on your UK VAT return but you can reclaim VAT on the majority of EU business travel costs via a special HMRC portal.
You will incur overseas VAT on hotel, restaurant, car hire, exhibition entrance fees etc. Most countries allow VAT recovery on such costs but, for example, some EU countries do not allow hotel VAT to be recovered.
So the key for IT contractors in this situation is to always obtain a VAT receipt, and check whether the country in question allows you to claim VAT on a particular expense. As an example, if you incur costs in relation to overseas trade shows, you should only incur VAT on costs such as entrance to the exhibition and potentially on hiring stands, depending on local rules.
Many other costs relating to exhibitions are VAT-free when charged to overseas VAT-registered businesses so if you provide your GB VAT registration number, the supplier should not charge VAT and you will account for UK VAT on your UK VAT return on the cost instead (and get a full credit for this on the same return).
Remember, provided you have the evidence to support a VAT reclaim, and if you have underclaimed VAT on expenses you can file a claim going back four years or make the claim on your next VAT return depending on the amounts – a rewarding exercise in many instances.