Since the new legislation on flat rate VAT came in in April thousands of small businesses have been forced into making the change over to standard rate VAT. It’s clear that the added administration and complexity is putting extra pressure on small business directors so we created this guide to help you when deciding how to operate under standard rate VAT. What is standard rate VAT? This may seem like a very simple question with an answer like ‘It’s charging your clients 20% tax on top of your fees while claiming back 20% on your expenses and sending the difference to HMRC’ but it’s not that simple. What happens when expenses are zero rated or have reduced rate VAT? What happens if I recharge my expenses to a client? What if the expenses are incurred overseas? What if my client is overseas? What if my client isn’t VAT registered? We will endeavor to answer these questions in the following guide.
Claiming VAT on expenses
We obviously can’t go through every expense and give you the correct VAT treatment but we will go through the most common expenses for businesses and the expenses that most people get wrong.
- Buying materials or products to sell on to clients, professional fees, computer equipment, hotels, phone bills, fuel, stationery and eating at restaurants are almost always subject to 20% VAT.
- Bank charges, books, journals, insurance, professional subscriptions, public transport (including flights) and postage are almost always 0% VAT.
Then there are grey areas like parking, rent, subcontractor costs, and food on the go that get a little more complex.
- On-street parking is usually 0%, while car parks usually have VAT.
- Rent in office blocks or industrial estates are almost always subject to VAT while smaller, isolated properties can often be owned by non-VAT registered landlords so they can’t charge VAT.
- Subcontractors are usually VAT registered if they deal primarily with businesses but most operate under the VAT threshold so it’s not always the case.
- Food is perhaps the most complex area of VAT and where most mistakes occur as whether the food is hot or cold makes a difference as well as whether you take it away or eat at the establishment. It’s also worth noting that if the food is purchased for entertaining purposes you cannot recover any of the VAT. The complexity can go as far as a gingerbread man being zero rated if it only has chocolate eyes but subject to 20% if they’ve painted him some chocolate trousers so we’re not going to go into every detail here so if you’re unsure, ask your accountant or if you’re feeling brave you could consult HMRC’s official notice on the topic.
Charging VAT to clients
As a general rule, if you’re VAT registered you should charge VAT on every invoice including on any expenses you recharge (even if you didn’t pay VAT on these expenses). The only exceptions are when the client is based outside of the UK or when the expenses qualify as disbursements. Disbursements are expenses that you pay on behalf of your client so they get the benefit of the good or service expensed. So your train to meet your client wouldn’t qualify but if you were a solicitor and paid the stamp duty on behalf of a client then it would be a disbursement because you didn’t pay any VAT and the expense is for the client rather than for you.
Still not sure?
The easiest way to discern whether you should claim the VAT on an expense is to ask for a VAT receipt whenever making a purchase for your business. If you’ve lost your receipt you should not claim VAT even if you know there is VAT on the expense as HMRC still require 7 years of records so you could get into trouble if you ever get investigated. We recommend that you take photos of all receipts at the time of purchase (preferably using an expense app or some accounting software app like FreeAgent) in order to ensure you claim the right amount of VAT and never lose your receipts.