When a limited company achieves multiple financial milestones, it indicates a considerable spike in its turnover.

However, whenever a limited company’s turnover crosses the figure of £90,000, VAT appears on the scene. As a result, the company must register for VAT. The VAT threshold ( £90,000) is the amount of turnover that a limited company can generate before it becomes obligated to register for VAT. 

To go further, Value-Added Tax, or VAT is levied on most goods and services in the UK. Now, sometimes, this tax can appear to be a hassle and an additional expense for many VAT-registered limited companies. However, the advantages accompanying VAT outweigh the steps involved in its registration.

Speaking of which, if you have decided to register your limited company for VAT, you must acquaint yourself with all the aspects of VAT. In this connection, our following blogs will help you effectively: 

What are the VAT requirements for a limited company?

What VAT scheme is best for your limited company? 

Notably, one of the prime benefits of registering your limited company for VAT is that you can reclaim VAT on many business-related expenses. However, reclaiming VAT back is not a seamless process. Instead, the rules involved are complicated, with multiple exceptions to items. Also, there are different VAT rates and schemes, making it difficult to calculate and reclaim VAT.

Accordingly, this blog will explain the basics of how to reclaim VAT for a limited company, the business expenditures of your limited company that are eligible for a reclaim, and how to ensure you calculate your reclaims correctly and stay compliant with HMRC regulations.

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What is reclaiming VAT?

In summary, the invoices received or the VAT you pay on purchases is called input VAT. By contrast, the invoices issued or the VAT you charge consumers is called output VAT.

While you can charge VAT  on your sales, you can viably reclaim VAT on your purchases. 

Thus, reclaiming VAT means recovering the VAT your company pays on purchases or expenses that are exclusively for business purposes.

Now, let’s dive into the details.

After your limited company becomes VAT-registered, you must start charging VAT on all your goods and services. Presently, the VAT is set at a standard rate of 20% for the majority of products and services. Now, you must pay the VAT amount to HMRC. 

Similarly, becoming a VAT-registered company also means you can claim back VAT on several business expenses and the majority of goods and services your company buys. Consequently, if you reclaim VAT for a limited company, the purchased items and services become 20% less expensive than when your company was not VAT-registered.

Who can reclaim VAT?

It is worth highlighting that you can be eligible to reclaim VAT for a limited company  if it is VAT-registered. That is, if a limited company’s VAT-taxable turnover crosses the £90,000 amount within a 12-month period, it must register for VAT. Notably, VAT-taxable turnover is the total value of everything your company sells that is not excluded from VAT.

What can you reclaim VAT for a limited company? 

Primarily, you can reclaim the VAT you paid on business expenditure, such as:

Office Materials:  All the supplies used in the company for carrying out day-to-day activities are VAT reclaimable, such as stationery, printer ink, and other consumables.

Business Supplies: Computers, furniture, software, repair services, and machinery.

Utilities: Electricity, water, and gas for business premises.

Travel Expenses: You can reclaim VAT on employee business travel expenditures, such as when they visit a client. It includes fuel, accommodation, and food for business trips.

Professional Services: Consultancy costs, like accounting and legal services for the running of your limited company.

Vehicles: If you buy or lease a vehicle for your company, you can reclaim VAT on that. Similarly, you can also reclaim 100% VAT on business-related fuel expenses.

Personal use: If you are using certain goods for both personal and business causes, you can reclaim a part or portion of VAT on them. For instance, if you carry out your business from home, you can only claim back the business component of services like utility bills and internet. 

When can you not reclaim VAT?

As previously mentioned, a limited company can qualify for reclaiming VAT only on the goods and services solely used for your business purposes. It signifies that non-business goods and services are ineligible for VAT reclaim.

For example, VAT paid on private or non-business-related purchases does not qualify for a reclaim.

Likewise, VAT costs for client entertainment can usually not be claimed back.

Finally, if you buy a car that you also use privately, you cannot reclaim VAT on it. However, the vehicles used exclusively for business are VAT reclaimable.

How to reclaim VAT for a limited company?

Comprehending how to reclaim VAT for a limited company is crucial in calculating the appropriate reclaimable VAT amount.  Subsequently, the following are the key steps for reclaiming VAT:

Registration for VAT:

As mentioned earlier, VAT registration is mandatory before you can reclaim VAT for a limited company. This process includes registering with HMRC online by providing the necessary details about your company. To get a detailed insight into the VAT registration for a limited company, read our post, How to register a limited company for VAT? 

Maintain accurate Records:

Maintaining accurate records is the most crucial part of reclaiming VAT for a limited company. You must have credible evidence to display the amount you have paid on the purchases. You can do so via:

VAT invoices:

You must maintain all the VAT invoices from purchases made. VAT invoices display the VAT rate you charged consumers and the VAT you paid.

Retail receipts:

Similarly, keeping retail receipts for business expenses is also important to reclaim VAT for a limited company. Although retail receipts may not always include VAT, you can still use them if the total purchase amount is less than £250. 

Bank statement:

It is worth pointing out that even if you don’t have receipts, you can still claim VAT back. To achieve this, you will need to present proof of purchase, like a bank statement exhibiting the transaction amount between your limited company and the VAT-registered business. You must also show that the purchases were purely for your business.  

File VAT Returns:

A VAT return is typically submitted quarterly. In addition, you can complete and submit the VAT Return form online on HMRC’s website, wherein you must report the following: 

Firstly, you will find the input VAT, the total VAT you’ve paid on your purchases in the accounting period for goods and services.

Secondly, you will calculate the output VAT, i.e. how much VAT your company has charged on its services and goods during the same accounting period.

Lastly, the difference between the two will determine whether you owe VAT to HMRC or qualify for a reclaim.

How to calculate how much VAT to reclaim??

The principle of calculating how much VAT you can reclaim is based on finding  the difference between the output VAT and the input VAT. To illustrate, you would first find the difference between the VAT your company has charged on its sales and the VAT your company has paid on its purchases.

Next, you will subtract the input VAT value from your output VAT value. If the result is negative, you will reclaim that amount. Conversely, if the result is positive, you must pay that amount to HMRC.

Alternatively, if a limited company charges more VAT to consumers than it pays on its purchases, it must pay the difference to HMRC. On the contrary, if a business pays more VAT than it charges its customers, it can reclaim the difference from HMRC.

For greater clarity, consider the following scenario where your 

Output VAT = £20,000 

and 

Input VAT = £10,000

Now, Output VAT – Input VAT = £20,000 – £10,000 = £10,000

Hence, you must pay £10,000 to HMRC as VAT.

On the other hand, if your 

Output VAT = £10,000

and

Input VAT = £20,000

Therefore,  Output VAT – Input VAT = £10,000 – £20,000 = -£10,000.

Since the figure is negative,  this is the amount you can claim back from HMRC.

How to receive a VAT reclaim payment?

Usually, VAT reclaims are processed within 30 days of HMRC obtaining your VAT return. If HMRC has your bank details, your repayment will be made immediately to your account. Otherwise, you will receive a check.

Conclusion:

One of the significant benefits of running a VAT-registered limited company is its ability to reclaim VAT. Your business can significantly reduce its costs and increase cash flow by understanding what expenses qualify for claiming back.

Notably, while the process might seem a bit demanding, professional advice from a competent accountant can make reclaiming VAT a hassle-free task. Accordingly, the accountants registered at Accountingfirms can be of immense help with your VAT requirements. Thus, with the right approach and accountant, make VAT less of a burden and more of an advantage for your limited company.

Disclaimer: The information provided on AccountingFirms.co.uk is for informational purposes only and should not be considered as financial advice. Always consult with a professional accountant to ensure compliance with UK laws and regulations.