TTR Barnes

For VAT-registered companies, reimbursing employee expenses can be a minefield. You may be entitled to claim back VAT on expenses and it’s important to remember that they should be treated as anything else you buy for your business. However, many businesses struggle to understand the rules and getting it wrong could result in strict penalties from HMRC. Read our guide to find out how to get it right.

Can you claim VAT on staff expenses?

VAT rules normally dictate that you can only reclaim VAT on supplies purchased directly for business use. However, there are some areas where the rules are relaxed.

It is possible to claim for VAT on certain expenses incurred by employees – but there are strict conditions. The key thing to bear in mind throughout this guide is that the expense should be incurred wholly, exclusively and necessarily on behalf of the business.

Remember, you cannot claim VAT back if you pay your employees a flat rate for expenses.

What CAN you claim for?

Office expenses/services

You can reclaim VAT on office expenses such as stationary, IT equipment, software or advertising an employee has paid for out of their own pocket. It doesn’t matter whether the employee is working in the office or remotely, so long as the expense was incurred on behalf of the business.

Bear in mind there are special rules for reclaiming VAT for:

• Individual computers and single pieces of computer equipment costing £50,000 or more before VAT
• Aircraft, ships and boats costing £50,000 or more before VAT
• Land and buildings costing £250,000 or more before VAT

Travel

This is one of the most common areas of employee expenses. Often businesses book travel on an employee’s behalf, but they may end up paying out of pocket for certain journeys – for example a taxi from the train station to a business meeting.

Remember, not all travel includes VAT. You should not attempt to reclaim VAT on train journeys, for example.

Something to be aware of is the VAT status of taxi drivers. Most taxi companies will provided receipts and a registered VAT number, however ride-sharing apps like Uber are more of a grey area. This is because Uber classes its employees as self-employed and will have their own VAT status.

Employee entertainment

You can reclaim VAT on expenses incurred for the purposes of staff entertainment, provided the entertainment is made available to all employees (not just directors) and is not an annual event.

Examples of permissable claims include:

• Food/drink provided for team building events or away days
• Meals out to reward good performance
• Lunch delivered to the office

Remember, there are separate rules relating to benefits in kind you provide to employees. Read our guide to gifts and events to find out more.

Overseas guests

While claims for business entertainment are usually not permitted, it is possible to reclaim VAT on expenses incurred entertaining guests visiting from overseas – provided they are “reasonable in scale and character”. For example, taking a customer visiting from overseas for a meal would likely be deemed reasonable.

Disbursements

Disbursements are items that you buy on behalf of the customer and expenses are items you buy for your employees to enable them to carry out their work. You can reclaim VAT on disbursements incurred by your business for the purpose of carrying out work for the customer, for example a piece of software you needed specifically for the project.

You should not claim for services you are simply recharging to the customer, for example the cost of an engineer visiting the customer’s site to carry out work.

Remember that if you decide to class something as a disbursement and don’t charge VAT then you aren’t allowed to claim the input tax on the service you bought as you are the end user.

What CAN’T you claim for?

Business entertainment

This is a common area of confusion. While HMRC allows businesses to reclaim VAT on subsistence, including food and drink for meetings, it does not allow for claims relating to business entertainment.

It is possible to claim VAT on reasonable expenses, such as basic refreshments provided for a meeting with a customer. It’s also possible to claim for expenses incurred if the meeting is held away from the office.

However, if you were to take the customer to an expensive restaurant and provide bottles of champagne, HMRC would not view this as reasonable. This also includes other forms of corporate entertainment, such as taking customers to the races. This is because it’s unlikely that this kind of event is purely for business purposes.

Remember, there are different rules for entertaining overseas guests.

Claiming VAT on expenses

You can reclaim VAT on expenses of up to £25 without a receipt, this is useful if an employee has paid a crossing toll or parking charges with change, for example.

For larger expenses you will need to keep careful records for reporting purposes, including receipts.

You can find out more about how to claim here.

Talk to the experts

VAT can be a confusing area for businesses. If you need further support, get in touch with our friendly North East team.

All information correct at time of going to print/live and on the best knowledge and understanding of the author at the time. This article is for general information only and does not constitute financial advice or recommendations for individual circumstances. No responsibility is taken for any actions taken on the base of the information within this article.