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The complete guide on reclaiming VAT on staff expenses

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There’s a huge amount of money that goes unclaimed when it comes to staff VAT expenses. 

The challenge with reclaiming VAT on employee expenses and other types of VAT is that the process can be time-consuming. However, it can be a huge money saver for both SMEs and big corporates alike. 

Knowing how VAT works, what the VAT rates are, and the eligibility criteria involved can help you recover it efficiently, and that’s exactly what we’re going to help with in this article.

What is VAT?

VAT stands for value-added tax. It’s also known in some countries as a goods and services tax. This type of tax is assessed based on the price of the product or service in question. It covers everything from the production to the distribution, and eventually, the sale to the customer.

This value-added tax is a form of consumption tax. Businesses collect it on behalf of the government and then that tax is used as revenue. This is then rolled out and distributed for a number of initiatives and programs that the government has for the country.

As a consumer, you don’t need to pay any extra costs to the product or service you’re buying because most of the time, the VAT is included already.

HMRC has many resources on VAT and how it all works in regards to paying. It also explains how you can go about reclaiming VAT too. This article will focus specifically on reclaiming for staff expenses.

What can you reclaim on staff expenses?

In order to reclaim staff expenses, your employees have to be:

  • Someone directly employed by you
  • Directors, partners or managers
  • Self-employed people are treated exactly like your employees (if paid the same way)
  • Helpers or stewards that assist in running events

Those who don’t fall under this category are pensioners and former employees, shareholders, and someone applying for a job with your business, aka interviewees.

The expense has to be necessary for the staff member to carry out the work. It should be incurred in the performance of the employee’s duties. It should be incurred by and paid for by the employee.

Employee travel expenses

Good news, you’re able to reclaim an amount of VAT on staff expenses when it comes to their travel. Most business trips, including any meals and accommodation that you may pay for whilst they’re there will also be possible for reclaiming on.

Note: If you pay your employees a flat rate for expenses, then you won’t be able to reclaim VAT.

For fuel used by staff for business travel, whether that be their own car or a company car, it will be available for reclaiming VAT on as long as you can prove it’s for business purposes. Although, it can only be for the percentage of mileage that refers to business use. 

Anything for private use won’t be applicable. For more on this see our section on how to reclaim VAT on fuel and business mileage.

Expenses for entertaining

When your staff are entertaining on behalf of the company, VAT isn’t available to reclaim. This is because it’s not necessary for the business to do so and therefore isn’t considered eligible for a reclaim.

However, other business expenses around entertainment can be reclaimed, check out more on business entertainment expenses here.  

It may take some time in order for your staff expenses to be processed and for your business to actually claim VAT. There may also be some waiting time in between when your VAT return has been submitted and when you receive your VAT refund. However, it’s all worth the wait when you could be saving a lot of money for your business.

Top businesses tips for efficient VAT recovery solutions

For effective VAT recovery, there are some helpful tips and frequently asked questions that are worth knowing to help make your reclaim as successful as possible. Remember, you can’t reclaim VAT if you already pay employees a flat rate for their expenses.

VAT on foreign travel expenses

Most countries will allow you to reclaim VAT on travel expenses. These will be things like accommodation and meals. Transport while in the country is also covered from rental cars to public transport. 

A lot of transport and motoring, when it comes to your employees, can be eligible for reclaims as long as it’s not for private use.

A non-EU company can reclaim VAT that’s put on employee business travel and expenses incurred in the EU. The list of expenses to be claimed can vary depending on the country and it’s legislations in place.

Can you reclaim VAT on staff medical expenses?

If you’re based in the UK, then a lot of medical services and insurances will be exempt from VAT and therefore you won’t need to reclaim. However, there are some that you might think of as being medical but aren’t. Anything that’s cosmetic or for aesthetic purposes, will be exempt. 

Keep all of your VAT receipts for recovering VAT

One of the most important things for efficiency for reclaiming VAT is to have all of your VAT receipts kept and stored in an organized and safe manner. Trust us, expense management will help a lot further down the line. Practice good bookkeeping now, and it will pay of at the end of the tax year. 

For the UK, you need to keep hold of four years worth of VAT receipts and if you haven’t reclaimed some of these in previous years, you can still reclaim it today. Make sure this is communicated in your travel policy for your workforce, if they don’t keep their receipts then their expenses cannot be reclaimed. 

Wrapping Up

Maintaining your staff expenses is something that’s important for your business to continue making the most revenue possible. It’s worth having a detailed system and process in place in order to make it easier for you as a business to reclaim on these expenses as and when it’s needed. Hopefully, with this guide, you’ve got more of an insight into how staff expenses can be reclaimed in the future.

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