Small business owners often have a tough time navigating tax and what expenses they can claim VAT on.
Let’s start with Taxi fares. Zero rating of domestic passenger transport does not apply if the vehicle is designed to carry fewer than ten passengers.
Taxi and hire car fares are therefore, standard rated and if the business provider is registrable for VAT, it must charge VAT to customers.
Extra charges for baggage, waiting time, etc are also standard rated as are referral fees from other taxi businesses.
Tips and gratuities given voluntarily are not payment for supplies and are outside the scope of VAT. VAT due is calculated by multiplying the fares, including extras, by the VAT fraction.
Registered persons (such as a standard rated Taxi driver) must issue a VAT invoice to any customer who asks for one.
If the taxi is VAT registered they should issue you with a receipt which includes the VAT registration number, the date and the amount of the fare which will enable you to reclaim the VAT as Input VAT (the VAT added to the price when you purchase goods or services that are liable to VAT).
What else can small businesses claim VAT on?
With VAT, you can only claim the full sum back on expenses which are exclusively for your business. This could be for office supplies, electrical equipment, transport costs and other services.
Partial VAT is more complicated, as Sean Toomer, founder and MD of Diverso Accountants, explains:
“If the reason you’re looking to only reclaim part of the VAT is because the item purchased will be used personally, as well as for the business, then you will not be able to claim VAT at all. With items you purchase which have a personal element or are even ‘available’ to be used personally, VAT cannot be reclaimed.
“However – stick with me here – if your business provides two types of service, one which is liable for VAT and one which is exempt from VAT, and you’ve purchased something which will be used for both services, you may be able to make a partial claim.”
Some items are exempt from VAT, like charity donations and insurance. Business entertainment is also exempt (though not employee entertainment, such as the Christmas party).
“One of the other oddities is that while you can’t claim back VAT on costs you incur to provide business entertainment to your clients, customers or contacts. However, you can claim the VAT back on costs incurred in entertaining your employees, such as an annual staff party,” says Toomer.
Can I reclaim VAT on second-hand goods?
Be aware that some second-hand goods have different rules to reclaim VAT. Toomer tells us more:
“You still need to pay VAT, however, traders also have the option to make sales under the VAT Margin Scheme.
“Under the Margin Scheme, rather than paying 20 per cent VAT on top of your sales, instead, you only pay VAT on the ‘margin’ you make on the sale, at a rate of 16.67 per cent. That means the VAT is included within your profit.
“For example, if you purchase a second-hand item for £100, and sell it for £120, your margin is the difference between what you purchased the item for and what you sell it for, so in this case £20. This £20 margin would include the VAT, meaning the VAT you’d pay to HMRC would be £3.33.”
Backdating VAT for previous expenses, even before you became a VAT-registered company, is a possibility. Generally speaking, it can be claimed on goods that you bought up to four years before registering. For services, it’s six months.
The goods must be bought by you as the entity that is registered for VAT and still held by you. If you used up the goods or services before you registered, they don’t count.
VAT on vehicles
Again, you can reclaim on vehicles, but they have to be solely and exclusively for your business – and you must be able to prove this to HMRC – its inclusion in an employee’s contract, for example. There’s a chance that you can claim on cars that are mostly intended to be used as taxis, self-drive rentals or for driving lessons.
You can only claim 50 per cent of your VAT when you lease a car if it’s replacing a company car which has been declared off-road. If the car isn’t available for private use or is being used only for business then you can claim 100 per cent of VAT. It must be ‘made unavailable for personal use’.
VAT-related expenses can normally be claimed back, such as repairs and servicing.
What about VAT on fuel?
Your fuel must be for business purposes.
If you use your car for both business and personal purposes, you can claim 100 per cent VAT back but only if you pay a fuel scale charge which is dictated by the size of your vehicle. Though if the charge turns out to be more expensive than the VAT you would reclaim, it’s probably better not to claim at all.
For vehicles that are purely for business, you can keep a log of your business miles and claim VAT for the mileage recorded.
“Make sure you’re aware of everything you can claim the VAT on,” says Toomer.
“For example, most small businesses claim mileage at 45p per mile, but then forget that they can also claim the VAT on the fuel they’ve purchased – for some businesses that can add up to a lot.”
How about staff travel?
Claim VAT on employee expenses like business trips, including meals and accommodation that you’re paying for.
The exception here is that you can’t reclaim if you give your employees a flat rate for expenses. Declare through Making Tax Digital and you’ll get your receipt within ten days of HMRC receiving it.
This is all so complicated – what potential mistakes should I be aware of?
“When it comes to VAT, errors are all too easy,” says Toomer. “One of the most common made by small businesses is claiming back VAT on items they assume have VAT but which do not. To avoid this blunder always make sure you check the invoice or receipt for the VAT amount, especially as some places will include different rates of VAT on one invoice with multiple items.
“The other most common error is small businesses under claiming VAT for items they do not have a receipt for or for items that they just don’t know about. I can’t stress enough how important it is to keep your receipts!”
But how do you dodge these easily made errors? There are tools you can use, though it can simply be about seeking the right advice, according to Sean Toomer.
“Definitely consider using a platform like Receipt Bank. It will not only ensure you’re claiming the correct VAT amount but will also keep a digital record of the invoice or receipt – something you’ll need as proof of purchase if HMRC ever comes knocking.
“We’d always urge caution around taking advice online, and while the HMRC website has sound information, it can be very difficult to navigate.
“One trick we always advise clients to use when it comes to difficult VAT queries is to call the VAT Helpline, quoting your VAT number. You can then be sure your query is recorded and will be on file with HMRC. This way, if HMRC queries your actions at a later date, you can prove it was based on their advice.”