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VAT-registered businesses pay input VAT on their purchased goods and services, which they can reclaim afterwards. Normally, they claim a VAT refund on their business expenses, even overpayments. However, with the intricate VAT regulations, reliefs and special considerations exist that allow taxpayers to reclaim VAT outside the normal basis, such as when they face bad debts or build a new home.
This article covers how to reclaim VAT in various circumstances, including overpayments, bad debts, and new build properties.
Quick Value-Added Tax Update [2024]
In April 2024, the new threshold for VAT registration and de-registration increased to £90,000 from £85,000. Businesses with an annual turnover more than the current threshold are required to register for VAT, and de-register, otherwise, if their income falls less than that set amount.
How to Reclaim VAT in UK
Only VAT registered businesses can reclaim VAT, particularly on but not limited to the following:
- Business expenditures
- VAT overpayments
- Bad debts due to delayed customer payments
- New house construction expenses
Whilst VAT reclaims are usually only allowed on expenses used wholly and exclusively for business, they apply in other circumstances, too. Typically, business expenses where VAT is reclaimable include:
- Stationery (e.g., printer ink, postage, paper, etc.)
- Stock items or raw materials for production
- Premises-related bills (e.g., rent, security, utilities, etc.)
- Employee (e.g., salary, bonuses, etc.)
- Travel (e.g., vehicle lease, fuel, etc.)
- Professional services
- Marketing
- IT tools
To be able to claim VAT, businesses must show HMRC the following:
- VAT return payments
- VAT rates charged to customers
- VAT invoices
- Purchase receipts
Once the input VAT (VAT the business pays for its purchases) exceeds the output VAT (VAT the business charges to its customers), the business can claim a refund through VAT returns.
How to Reclaim VAT Overpayment
HMRC penalises both VAT underpayment and overpayment, considering them downright errors on the taxpayers’ part. These may be caused by simple mistyped numbers or glitches at some point. Deliberate errors attract penalties and will disqualify the business from any potential overpayment refund.
If the overpayment is proven to be done out of carelessness, they may avoid penalties and qualify for a refund as a result.
Businesses may simply correct their VAT information from the 4 previous years by adjusting their next VAT returns, especially if the errors are of a net value not more than £10,000 or between £10,000 and £50,000 (but less than 1% of the total sales).
The second correction method is by informing HMRC, which applies to deliberate errors, errors of a net value of £50,000 or more, and errors of more than £10,000 (if 1% of the total sales is exceeded).
Seeking guidance from tax experts during VAT corrections is necessary to avoid further errors and penalties.
How to Reclaim VAT on Bad Debt
Bad debts occur when customers do not pay the business on the date agreed upon and the latter has already paid VAT on the expected income. In these times of uncertainty, businesses may qualify for VAT relief granted on bad debts.
They can reclaim the VAT on their next VAT return and repay HMRC once the customers have finally paid. Businesses who meet the following criteria are eligible for the VAT relief:
- Having supplied and charged VAT to the customer. The VAT must have been already paid to HMRC in the previous VAT return.
- Not claiming the bad debt relief under the cash accounting scheme.
- The debt already exceeding six months (based on the debt’s due date, not the invoice date).
- Having written off the debts in business accounts through memos.
- Not making the supply at an above open market value.
- Not having reassigned the debt to another legal body.
- Being able to show invoice records and how the bad debt relief was calculated.
Businesses must claim bad debt relief with tax experts to make accurate reclaims and repayments.
How to Reclaim VAT on New Build Property
Costs of building a new home are also eligible for VAT reclaims. Aside from new build houses, VAT-registered taxpayers may also claim VAT if:
- They are renovating a 10-year or more unused property to make it re-habitable.
- They are re-constructing a non-residential property into residential.
- They are also regenerating garages after the new build property is completed.
- They are undertaking certain landscaping projects for a holiday home to be used by a household or an individual.
Annexes, extensions, and loft conversions are strictly not included. New build projects not eligible for VAT reclaim include:
- Non-independent dwellings
- Properties to be used for business
- Existing home refurbishment
- Separate buildings (e.g., gym, sheds, etc.)
Refund claims must only be made via VAT returns three months after the construction project is completed. To qualify for the VAT reclaim, individuals or organisations must have the following documents ready:
- Exhaustive professional plans
- Correct planning permission
- Evidence of completion, usually through a certificate
HMRC usually responds within six weeks about when the refund will be credited.
Frequently Asked Questions
VAT reclaims are made via VAT returns, usually during each quarter.
Generally, businesses can claim back up to 4 years for their purchased goods before being VAT-registered, and 6 months back for service purchases, given it is the same VAT-registered entity that made the purchase.
In the UK, a VAT refund reimburses the amount equivalent to a VAT rate of 20%. However, the refund is usually not equivalent to 20% of the total item price, as the price paid already includes the VAT.
Businesses may reclaim VAT through their VAT 3 return.
Businesses can only claim VAT on purchases made from another VAT-registered business.
How Legend Financial Can Help
Reclaiming VAT can be very financially advantageous for the business, even if they employ and pay for a bookkeeping or tax accounting expert in the process. Legend Financial is a reputable tax firm throughout the UK with over ten years of experience providing tax, accountancy, business development, and financial management services.
We are here to aid you on how to reclaim VAT accurately and seamlessly. We have helped a lot of businesses file VAT returns and successfully get the maximum refund they are owed. For your VAT concerns, reach out to our VAT specialists anytime today!
