Paying VAT on the goods and services you purchase in the course of running your business is fairly inevitable. With most goods and services attracting VAT at a rate of 20%, it can mean significant extra spending.

Fortunately, VAT is designed to be paid by the consumer of the goods or services – the person at the end of the chain – not by the businesses that supply them. This means that you may be able to reclaim the VAT your business pays out for goods and services.

Who can reclaim VAT?

Not everyone can claim back the VAT they pay, and you’ll normally only be able to reclaim VAT if your business is VAT registered. Some types of business are exempt from VAT altogether, such as those dealing solely with insurance, educational training, art, and antiques, so they won’t be able to register and therefore aren’t able to claim the VAT they pay out.

What about businesses dealing with zero rated goods and services?

It’s easy to get confused, but “VAT exempt” and “VAT zero rated” mean two different things. When something is exempt from VAT, it means that no VAT – at all- can be charged when the item is supplied.

Goods and services which are VAT zero-rated are still subject to VAT, but at a rate of 0%. So, you won’t actually need to pay anything extra, but you will need to report it on your VAT return.

Typical examples of VAT zero-rated items usually relate to health, food, children’s clothing, and publishing. It’s tricky though, because ‘food’ does not include alcohol, and not all food is zero-rated. Just to confuse things even more, VAT registered businesses which prepare and sell food for consumption on the premises do not generally fall into the zero-rated category.

Your business can still be VAT registered and reclaim VAT on the purchases it makes if it deals with zero-rated goods or services. If you mainly supply zero-rated goods and services, you might decide to apply for a VAT exemption instead.

How does reclaiming and charging VAT work?

This is based on the VAT coming in to the business, and the VAT going out. We’ll break it down into sections below.

VAT coming into your business

When your business registers for VAT, you must charge VAT at the appropriate rate on all goods and services you sell (apart from any that are exempt). In that respect, you’re acting a bit like a tax collector on behalf of HMRC, so you’ll need to issue your customers with a VAT invoice which clearly shows the amount of VAT being charged, the rate used, and on what items.

The VAT leaving your business

You must also keep the VAT invoices for any goods and services you purchase for the business – because these show how much VAT you’ve paid out to other VAT-registered businesses.

Reclaiming or paying the difference between the two

When you make VAT submissions (sometimes known as a VAT return) to HMRC, you’ll pay or reclaim the difference between the VAT you charge to your customers (the VAT you collect), and the VAT you pay out on purchases.

• Reclaim the difference: The VAT you pay out on purchases is more than the VAT that you charge and collect from customers
• Pay the difference: The VAT you pay out on purchases is less than the VAT that you charge and collect from customers

For some businesses this can work out rather well, especially if they mainly sell zero-rated goods and services. This means that your customers are paying 0% VAT, so whilst you’re not collecting much VAT on your sales, you will probably have costs which aren’t zero-rated, such as fuel, stationery, and IT services.

It effectively means that you’re paying more VAT to your suppliers than you’re collecting from your customers and as such, you can reclaim the difference from HMRC. As long as your business is VAT registered you can reclaim VAT on most of your business’s costs. It’s why some businesses find it helpful to register for VAT voluntarily!
 

How often can I reclaim VAT?

You’ll normally be able to reclaim any VAT once you make your VAT submission. Most businesses make VAT submissions on a quarterly basis (every 3 months), but there are different VAT accounting schemes and they don’t all have the same requirements.

Standard VAT accounting scheme

This is the accounting scheme that most businesses use. Under this scheme you record VAT on every purchase and every sale, and make a VAT submission to HMRC at the end of each VAT quarter. You’ll pay or reclaim the VAT due at that point.

VAT Annual Accounting Scheme

Some businesses are allowed to use the VAT Annual Accounting Scheme, and will only need make a VAT submission to HMRC once a year. You’ll pay an estimate of what’s due based on your previous year’s VAT bill.

VAT Flat Rate Scheme (FRS)

Under this scheme, you avoid all the VAT accounting requirements and simply pay a flat rate of VAT based on a percentage of your annual turnover. You’ll still charge customers the full appropriate rate of VAT, but rather than reclaiming the VAT you pay out, you just keep the difference between your flat rate payment and the VAT you collect.

Can I reclaim VAT on vehicle and fuel costs?

One of the main rules for reclaiming VAT is that the costs must relate solely to the business, so VAT can get a bit complicated for vehicles, especially where company cars are involved. The short answer is that you may be able to claim the portion of VAT which relates to any business usage, but because it’s quite complex we deal with it in a separate article, which you will find here.

Can I reclaim VAT I incurred before registering?

The short answer is, surprisingly, yes! It’s quite common for businesses to register for VAT some time, often years, after they started trading. This might be because turnover did not previously exceed the VAT registration threshold, or the business has changed in some other way.

It’s quite possible that the goods or services you paid VAT on before you registered are still being used in the business. It’s possible to reclaim the VAT you paid on goods bought up to 4 years before registering, and for services up to 6 months before.

Can I reclaim VAT after de-registering?

Yes, you may be able to make a claim for VAT after you de-register or cancel your registration, as long as you incurred whilst you were registered. This might happen for several reasons, such as:

• Sales invoices where you’ve accounted for the VAT you charged, but the customer hasn’t paid you and the invoice needs to be written off
• Legal or accountancy costs
• Goods purchased prior to de-registering

 
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