Tax Questions: Reclaiming VAT on Business Purchases
When it comes to buying for your business, some items are clearly business purchases, but what about the likes of artwork for your office and memberships to private clubs? One question we often get asked is can I reclaim VAT paid on purchases solely for use on business premises? The answer is it depends.
Input tax rules
Aside from special rules for partly exempt businesses, it’s a common misconception that VAT paid on purchases (input tax) can be reclaimed for every expense incurred by a registered business.
A precondition for reclaiming input tax is there must be a clear business motive at the time the expense is incurred. It’s not enough for a purchase to benefit the business, the expenditure must have and immediate direct link to VAT’able supplies you make/will make and not just a potential side effect.
For example, membership fees for a private club on which VAT is charged. Although you might make business contacts through the club, say several lucrative contracts for your business – HMRC can’t deny the membership benefits the business but when the expense was incurred it wasn’t reasonable to say it had a direct, immediate link to business VAT’able supplies. HMRC would argue the expense was private and the benefit to the business, a side effect.
Business Purpose
HMRC has disputed many input tax claims through court on the basis of no direct business motive. However, HMRC can’t dispute a VAT claim just because an expense wasn’t necessary for your business. If the motive for it can be reasonably said to be at least partly for the business, you can recover a proportionate amount of the input tax.
VAT Law
VAT legislation isn’t overly clear on what counts as a business purchase. However, courts interpret the law as meaning that a key factor is ‘intention of the purchaser’.
For example, if you buy artwork for the workplace to create a good impression to attract existing or potential customers, this is a direct and immediate link to the supplies your business makes and the input tax is recoverable. If you buy artwork because you like it and locate it in the workplace in your private office where it is unlikely to be seen by customers, there will be no direct and immediate link to your business and input tax can’t be reclaimed.
The motive for a purchase might not be clear to a third party like HMRC. Keep records. Boardroom or partner meeting area art reflects motives for the purchase. If HMRC questions why you reclaimed input tax you can use records to prove business motive.
Timing
If when you incur an expense it’s intended wholly for business purposes, and you reclaim all the input tax, but later there’s private use, you don’t have to repay the amount reclaimed. The reverse is also true, and so consider future use of major expenses carefully at time of purchase. Entitlement largely depends on motives at the time the purchase was made. If, for example, the reason is to promote your firm’s image to boost sales – that’s OK and you can reclaim VAT.
Let’s Talk
For help claiming back VAT on business purchases, why not get in touch with our team of tax specialists at LHP on Let’s Talk. We can advise you on your business purchases to ensure the most efficient tax solutions and even manage your VAT returns for you.
