Freelancers' Questions: When can I reclaim VAT?
I’m a VAT-registered creative industry freelancer, but suffer the same problem as other micro-businesses as I am not sure when I am entitled to reclaim VAT. Is there an easy-to-remember rule on which items I can recover VAT on? Also, I suppose I must remain without the VAT repayment in the event that I’ve already paid for some items but forgot to recoup their VAT?
The basic rule is that the majority of the VAT you incur on business expenses and other costs as a VAT-registered freelancer is fully recoverable.
So VAT can be reclaimed in full on costs incurred 100% for business purposes and paid for by the business. This includes costs you incur, such as from training courses or from purchasing software, which arise because they enable you to provide your services more effectively.
If costs are incurred partly for private and partly for business purposes, part of the VAT can be claimed. Bear in mind though, VAT can only be claimed if you have a VAT invoice showing the requisite details including the business name, among other details.
If you work from home it is likely you will have expenses with mixed use. You can use any reasonable method to apportion VAT recovery. For example, if you work from home and have a single telephone line used for both purposes, as opposed to a separate business line, you should determine what would be a reasonable way of working out what percentage of calls are business calls. A starting point would be an itemised phone bill, and you could reasonably take the view that all calls made Monday to Friday during working hours are business calls, and the VAT on this proportion of the total would be recoverable.
If you work from an office at home, it is acceptable to claim some of the VAT incurred on utility costs on the basis they feed your home office. Again, a reasonable business proportion should be determined and this percentage of the VAT claimed. It would be advisable to notify HM Revenue & Customs in writing of your proposed apportionment approach for VAT on mixed expenses to avoid the risk of them disagreeing with your methodology at a later date.
Lastly, it seems from the final part of your question that you are not aware that you can make retrospective claims with VAT. This means that provided you have the evidence to support a VAT reclaim, and if you have under-claimed VAT on expenses, you can file a claim going back four years, or make the claim on your next VAT return depending on the amounts.
The expert was Julie Park, managing director of the VAT Consultancy.
18th September 2013