How to reclaim VAT for your business

As a business owner, paying VAT is just something you ‘have to do.’ You will pay VAT on the majority of goods and services you purchase in the running of the business. And, as most goods and services attract VAT at 20%, that’s a big cost to your business.

But VAT is designed to be paid ultimately by the end consumer of the goods or services, not by the businesses that supply them.

Fortunately, you may be able to reclaim the VAT you pay out for goods and services related to your business. So, let’s look at how that works.

Who can reclaim VAT?

Firstly, in order reclaim VAT your business must be VAT registered. A few types of business are exempt from VAT, including those dealing in insurance, educational training, art, and antiques.

What about businesses dealing with zero rated goods and services?

Being VAT exempt is different to “zero-rated” goods and services. In this case the goods or services are still chargeable to VAT but at a rate of 0%. The main categories of business that are zero-rated are health, food, children’s clothing, and publishing.

Food does not include alcohol, and not all food is zero-rated. Just to confuse things, businesses that prepare and sell food for consumption on the premises do not generally fall into the zero-rated category.

For some businesses this can work out rather well. Even though you might mainly sell zero-rated goods and services on which your customers will pay 0% VAT, 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 does reclaiming and charging VAT work?

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). You’ll need to issue your customers with a VAT invoice which shows the amount of VAT they are paying.

You must also keep the VAT invoices for any goods and services you purchase in the running of the business. When you make VAT submissions you’ll pay or reclaim the difference between the VAT you charge to your customers, and the VAT you pay out.

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

Most businesses do this quarterly (every 3 months) but there are different VAT accounting schemes with slightly different requirements

How do I make my VAT submissions?

In most cases you need to submit your VAT returns quarterly. From April 2022 businesses registered for VAT must comply with Making Tax Digital (MTD) legislation, and submit VAT returns online.

Reclaiming VAT incurred before registering

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 of £85,000, or the business has changed in some other way.

It’s quite possible that expenditure incurred before registering for VAT was for goods or services that are still being used in the business after registering.

The good news is that 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.

Reclaiming VAT after de-registering

There may be instances where you have not reclaimed VAT on eligible costs before de-registering for VAT.

These might include:

• Bad Debts where you have paid VAT on the invoice, but not been paid by a customer.
• Legal or accountancy costs
• Goods purchased prior to de-registering.

The good news is that you may be able to reclaim, or claim the VAT on such items, even after de-registering your business.