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Steve Allen of VAT Solutions (UK) Ltd offers some useful tips regarding input VAT recovery claims.

Steve Allen

Own staff

HMRC accepts that supplies that are, prima facie, made to employees, can be treated as if they were supplied to the employer provided the employer meets the full cost, and they have a legitimate business purpose.

For example: subsistence costs, removal expenses for staff relocation, and ‘petty cash’ purchases.

Self-employed and contractors

The difficulty comes when you are dealing with self-employed consultants and contractors. If they are VAT registered, it should not pose much of a problem. They include their subsistence and other similar expenses as part of their component costs to you, charge VAT on the whole amount, and you claim it all back on your VAT return.

Not VAT registered

If your outside consultant or contractor is not VAT registered, this can pose a problem, because he will pass on to you the VAT he pays on his costs, but you can’t claim it back because you don’t have a VAT invoice.

Example: He incurs a hotel bill of £100 plus VAT of £17.50 in connection with the work he is doing for you. Being unregistered, he passes on the total cost to you (i.e. £117.50) - you have no VAT to reclaim.

Tip. HMRC accepts that many businesses now find themselves in this position, and incur irrecoverable VAT as a result. In these circumstances, where a business reimburses subsistence, road fuel, and other motoring costs incurred by the self-employed person working for your business, HMRC will allow you to recover the VAT
on these costs provided the following conditions are met:

• The individual is “employed” on the same basis as an employee, i.e. is paid on a fixed hourly rate, being unassociated with the trading profits of the business.
• The individual incurs the expenditure only in respect of “employment” by the business. Where the individual represents a number of firms at the same time (e.g. a self employed salesman), any subsistence does not relate to one ‘employer’, and none of those firms can treat the VAT incurred as input tax.
• The individual receives no payment from the end customer.
• The business reimburses the individual at cost, including VAT, putting the expense in the normal business accounts (and getting a VAT invoice).

In addition, if the self employed person is a labourer or contractor, and purchases tools or materials to use on a specific job for your business, the VAT Officer may accept that the VAT incurred is your input VAT provided, in the case of tools, they become the property of your business, and, in the case of materials, they are incorporated into, and become a component cost of, the supply by your business to the final customer.

Tip. If you engage a self-employed person to work for you, find out if he is VAT registered, if he is not, explain that you would like to treat any reimbursements that you make to him in this manner, in order to maximise your VAT recovery.

Tip. Remember to get the VAT invoice from the self-employed person, and, as far as possible, treat it in the same way as reimbursements made to employees.

Tip. It is always possible that when you are visited by a VAT Officer, he will query this treatment. If he does, quote him his own internal guidance which states that this treatment is acceptable. The guidance is found in HM Revenue & Customs Manual V1-13, Section 7, paragraphs 7.4 and 7.5.