You are buying new IT equipment, mainly for use at home, but occasionally it will be used for work. Can you reclaim the VAT on the cost of the equipment and is there any advantage in doing so? VAT expert John Craig takes a closer look.
‘Putting it through the business’ is the old chestnut that you’ll often hear about putting expenses through the business as if there’s a magical tax advantage in doing so. There isn’t. Just because an expense is recorded in the business’s accounts doesn’t mean you’ll receive a tax deduction for it. In fact, your bookkeeper and accountant are obliged to adjust the figures for HMRC to exclude costs which are not for the business.
When it comes to completing your returns you can’t reclaim any VAT for a purchase which isn’t for your business. For example, if your business paid for a romantic dinner for you and your partner, it can’t reclaim the VAT. However, for a purchase which is both business and personal, say equipment which is mainly for private use but will also be used for the business, the amount of VAT that can be reclaimed depends on which of the two methods you use.
HMRC accepts that even a small amount of business use (as long as it isn’t for the purpose of making exempt supplies) entitles a business to reclaim VAT.
If a purchase is of consumable goods or services, say stock or broadband, you can reclaim the VAT corresponding to the proportion of business use. HMRC will accept any fair or reasonable estimate. But if the goods are equipment where there could be varying business and private use, there are two ways to account for the VAT.
1. Reclaim some of the VAT
If when you make a purchase you have a reasonable idea of the proportion of business and private use, you can simply reclaim VAT in proportion to the expected business use, and that’s the end of the matter. However, this method has a potential drawback or advantage.
If your private use turns out to be different from your estimate you can’t amend your claim. This can work in your favour or HMRC’s.
2. Reclaim all of the VAT
Alternatively, as long as you expect there to be some business use you can reclaim all the VAT on the purchase and then pay some only when you use the equipment for private use. HMRC has a formula for working out the VAT you must pay.
In April 2018, J Brown purchases a van for £20,000 plus VAT of £4,000. It was intended for business use only and J Brown reclaims all of the VAT. For the whole of the VAT quarter ended 31 March 2019 one of the firm’s partners uses the van solely for private purposes. J Brown must account for VAT on the cost of the van divided by the lesser of the number of months the business expects to own and use the van, and 60. The result is multiplied by the number of months in the VAT return period, then multiplied by the proportion of private use, in this case 100%. The VAT payable is 20% of the result, i.e. £200 in this example, assuming that the business expects to own and use the van for at least 60 months.
If you don’t expect the purchase to be used in your business, quite simply you can’t reclaim any VAT, even if the position changes later. However, if you expect even a small proportion of business use you can reclaim a corresponding amount of VAT or reclaim all of it at the time of purchase and pay VAT for any actual private use.