Reclaiming VAT can be a valuable option for businesses, whether you’ve overpaid VAT, have bad debts, or are working on new build projects. While VAT is typically paid on business expenses, there are various circumstances where you can reclaim it. In this guide, we’ll explain how to reclaim VAT in the UK, covering overpayments, bad debt, and new build projects.
Quick Update on VAT for 2024
From April 2024, the VAT registration threshold has been increased from £85,000 to £90,000. This means that businesses with an annual turnover of more than £90,000 must register for VAT, while businesses below this threshold can de-register if their income drops below this amount.
How to Reclaim VAT in the UK
Only VAT-registered businesses can reclaim VAT. Typically, businesses can reclaim VAT on the following:
- Business expenses
- VAT overpayments
- Bad debts from customers
- Costs associated with new house construction
For VAT to be reclaimable, the expense must be used “wholly and exclusively” for business purposes. Some common examples include:
- Office supplies (stationery, printer ink, etc.)
- Stock and raw materials
- Premises-related expenses (rent, utilities, etc.)
- Employee-related expenses (salary, bonuses)
- Travel costs (fuel, vehicle leases)
- Professional services
- IT tools and software
- Marketing and advertising
To reclaim VAT, businesses need to provide HMRC with their VAT return details, VAT invoices, and receipts for purchases made. If the business’s input VAT (VAT paid on purchases) exceeds the output VAT (VAT charged to customers), they can claim the difference as a refund.
How to Reclaim VAT Overpayment
VAT overpayments can happen due to errors like incorrect calculations or mistakes during the VAT return process. HMRC considers both underpayments and overpayments errors, with penalties for deliberate mistakes.
If you overpay VAT by mistake, you may be able to avoid penalties if the error was unintentional. Overpayments can typically be corrected by adjusting your next VAT return, especially if the error is less than £10,000 or falls below 1% of total sales.
For larger errors, especially those exceeding £50,000, you need to inform HMRC directly. Tax professionals can assist with correcting VAT returns to avoid mistakes and penalties.
How to Reclaim VAT on Bad Debt
Bad debt relief allows businesses to reclaim VAT on debts that remain unpaid for a certain period. If a customer fails to pay on time and VAT has already been paid to HMRC, businesses can reclaim the VAT on these unpaid debts.
To be eligible for bad debt relief, businesses must meet the following criteria:
- VAT must have already been paid to HMRC.
- The debt must be more than six months overdue (calculated from the due date, not the invoice date).
- The debt must be written off in the business accounts.
- The business cannot use the cash accounting scheme for the claim.
- The supply must not be sold above the open market value.
- The debt must not be transferred to another legal entity.
It’s essential to work with a tax expert when making a bad debt claim to ensure the VAT refund is calculated correctly.
How to Reclaim VAT on New Build Property
If you’re involved in building a new home, certain expenses related to the construction are eligible for VAT reclaims. This applies to new builds and also includes some renovation projects.
You can reclaim VAT if:
- You’re building a new home.
- You’re renovating a property that has been unused for at least 10 years to make it habitable.
- You’re converting non-residential buildings into residential properties.
- You’re carrying out landscaping work for a holiday home.
However, VAT cannot be reclaimed for the following:
- Extensions, annexes, or loft conversions.
- Non-independent dwellings (e.g., properties used for business).
- Refurbishments of existing homes.
- Separate buildings like gyms or sheds.
To qualify for VAT reclaims on new builds, businesses must provide certain documentation, including planning permissions, professional plans, and evidence of project completion, usually via a completion certificate.
Refund claims for new build projects can be made three months after the construction is completed. HMRC typically processes the refund within six weeks.
Conclusion
Reclaiming VAT can significantly benefit your business, whether it’s due to overpayments, bad debts, or construction costs. Understanding the rules and knowing when and how to make a claim is essential for minimizing tax liabilities. If you’re unsure about the process or need assistance with your VAT claims, consulting with tax professionals is highly recommended to ensure everything is handled correctly.
