Your firm is relocating premises and spending a lot on refurbishments including expensive furnishings and artwork for the offices. A colleague has said you might not be entitled to reclaim VAT on some of these costs. Are they right? VAT expert John Craig advises.
If you are VAT registered and buy goods or services for use in your business, you can reclaim the VAT paid on them with some exceptions. For example, while there is no distinction between VAT on purchases of capital items, e.g. equipment, compared with VAT on day-to-day costs like overheads, there are special rules for expensive purchases such as land and buildings. VAT can only be reclaimed if there’s wholly or partly a business purpose which in turn is clearly linked to making Vatable sales.
ABC pay the membership fees to a private club for each of the business owners. They argue that the VAT on the club fees is reclaimable as they are only members because it gives them access to influential contacts who can help ABC’s business. HMRC won’t accept that this factor alone entitles ABC to reclaim the VAT.
According to HMRC there must be a clear and direct link between the cost and Vatable sales. However, what counts as a clear and direct link is open to debate especially when other issues, such as private use of a purchase, are involved.
In practice, just because personal benefit is derived from a purchase does not prevent you from recovering VAT or restrict the amount you can reclaim. You might spend thousands of pounds on office furnishings, wallpaper and carpets when a trip to Ikea would have netted you everything you needed for a fraction of the price. This too doesn’t matter when reclaiming VAT. What does matter is why you spent the money at all.
Unwarranted luxury can be a stumbling block for income and corporation tax deductions (but not VAT).
The right to reclaim VAT isn’t whether the goods or services you buy are luxury items, from which you might derive some personal pleasure, it’s their intended use in your business that’s important.
Note however that if you subsequently sell or give away any of the items to third parties, staff or directors, or if you as owner of the business remove items from the business for your personal use then VAT must be accounted for , calculated on the consideration received or on the value of the goods.
It’s the motive at the time of purchase that determines if VAT can be reclaimed. Whether or not it’s a luxury item or service is irrelevant.
For other VAT related queries please do contact the team direct.