Andrew Needham looks at VAT recovery on business trips.
The rules for recovering VAT on business and travel expenses incurred on a business trip can be something of a minefield. Apart from not knowing whether or not the VAT is recoverable, another common problem is in determining whether the costs have VAT on them to begin with.
A business can generally reclaim the VAT on travel and subsistence expenses where a director, partner, sole proprietor or employee is away from their normal place of work on a business trip.
The business must pay for the actual cost or a proportion of the actual cost of these expenses. A business cannot reclaim VAT on expenses when it pays an employee a flat rate. For example, you give an employee a flat £25 per night for buying a meal; in these circumstances, you cannot reclaim any VAT. However, if the business pays for the exact cost of the meal and the employee passes the invoice to the employer, they can reclaim the VAT.
What costs have VAT on them?
The general rule is that most things have VAT on them, but some travel and subsistence expenses are zero-rated so there is no VAT to reclaim. The following are zero-rated, and therefore no VAT is claimable:
- takeaway sandwiches;
- rail fares;
- ship and ferry fares;
- air fares; and
- coach fares.
However, there is VAT on taxi fares if the taxi driver is VAT registered, and it is worth confirming this before trying to claim back any VAT.
Businesses often try and claim back the non-existent VAT on these supplies, and HMRC will look for them during an inspection as it gives them an easy assessment.
Meals, drinks, and overnight hotel accommodation will have VAT on them, so VAT can be reclaimed on these costs when staff are away on business.
Self-employed contractors
If you engage self-employed contractors who go on business trips for your business and you treat them in the same way as your own staff, you can reclaim the VAT on costs they claim back from you through your expenses system.
Entertainment trap
Sometimes a business trip might include costs which have elements of business entertainment as well as travel and subsistence. For example, you send a salesman to a meeting in London and he stays overnight, but then takes the client out to lunch following the meeting.
Under the subsistence rules, the VAT on the employee’s hotel bill is recoverable, but the lunch with the client has an element of entertainment about it, so he can only reclaim the VAT relating to his meal.
Overseas trips
From time to time, most businesses send staff on business trips to other EU Member States. All of these countries have a VAT system, so you will be incurring VAT costs that you cannot claim back on your UK VAT return. However, the EU has set up a system, operated by all Member States, that allows businesses to recover VAT incurred in these circumstances. This system is known as the ‘8th Directive refund procedure’.
The system is electronic, and can be completed online through the HMRC website. To simplify matters, claims can be made in English. Up to five claims a year can be made, and you have nine months after the end of the year to make a claim. So, any claims for 2016 would have to be made by 30 September 2017. The EU tax authority then has four months to process the claim.
Practical Tip:
If your business makes business trips you can reclaim the VAT you incur, even on some overseas trips, but make sure you have been charged VAT in the first place!
