VAT Invoices and how to deal with them are important for any business owner.
Is there a risk that HMRC could disallow input tax claimed on expenses paid for by company employees and the VAT invoice is often addressed to the employee?
𝗖𝗼𝗻𝗱𝗶𝘁𝗶𝗼𝗻𝘀 𝗳𝗼𝗿 𝗰𝗹𝗮𝗶𝗺𝗶𝗻𝗴 𝗶𝗻𝗽𝘂𝘁 𝘁𝗮𝘅
HMRC states very specific conditions for claiming input tax. These are:
• the expense must be for the purpose of your business
• it must relate to your taxable business activities; and
• you have received goods or services from a VAT-registered supplier and hold evidence to support the claim, i.e. a VAT invoice.
It is possible that an expense could partly relate to your business activities and partly to non-business or private purposes. You should apportion your input tax on any fair and reasonable basis so that you only claim it on the business element of the expenditure.
HMRC accepts that there will be cases when a VAT invoice is addressed to an employee but still relates to your business, e.g. hotel accommodation for a business trip where the booking was made in the name of the employee.
You can still claim input tax as long as the following conditions are met:
• the employer bears the full cost of the expense in question
• the expense must clearly relate to a business purpose; and
• a tax invoice is held to support your claim.
There is no problem with an employee paying for an expense out of their own pocket but then recovering the cost from your business with, say, a weekly or monthly expenses claim. The key issue is to consider who picks up the final bill for the expense, i.e. the employer in this situation.
𝗪𝗵𝗮𝘁 𝗲𝘅𝗽𝗲𝗻𝘀𝗲𝘀 𝘁𝗼 𝗯𝗲 𝗺𝗶𝗻𝗱𝗳𝘂𝗹 𝗼𝗳.
If you allow your employees to claim for the cost of meals consumed locally, then HMRC is likely to disallow any input tax you claim as a non-business expense. As a general guide, five miles or more from the usual workplace is a useful parameter.
What about subcontractors?
There is an opportunity to claim input tax on subsistence costs that relate to your subcontractors, as long as you pay their expenses on the same terms as you do for your employees.
This opportunity is mainly relevant to subcontractors who are not VAT registered. If they are registered for VAT, they will usually claim input tax on their own return and recharge you for the expense on their sales invoice, adding VAT at 20%.
A business recharging expenses to a customer will charge the same rate of VAT as they do on their services, usually 20%.
A builder supplying zero-rated building services will also zero-rate their travel and subsistence costs paid by their customer.
HMRC will accept that a supply is still made to your business rather than an employee if it is for a business purpose.
You must fully pay for the expense and retain tax invoices received from your employees to support your input tax claim.