Small businesses in the UK face a tricky balancing act when it comes to managing cash flow, investing in growth opportunities and ensuring sufficient funds are available for regular liabilities, such as payroll, supplier payments, and tax bills., Reclaiming VAT is just one of the ways to support these efforts. 

In this guide, we walk you through the process of reclaiming VAT and limitations to be aware of, so you know how to maximise your financial benefits.

Who can reclaim VAT?

In the UK, only businesses that are VAT-registered can claim back VAT. You must register for VAT if your business meets one of the following requirements: 

• Your turnover over the last 12 months was £85,000.
• You expect your turnover to be over £85,000 over the next 30 days.
• You and your business are based outside the UK, and you supply goods or services to the UK.

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How far back can you reclaim VAT?

You can generally reclaim VAT on purchases made within the previous 4 years. Certain exceptions and conditions may apply, though. For example, if you recently registered for VAT, you may be able to reclaim VAT on purchases made up to 6 months before your registration date. You can usually fix mistakes on a VAT return within 4 years of the accounting period. 

To get specific guidance for your situation, consult a tax professional or HM Revenue and Customs (HMRC).

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What can you reclaim VAT on?

Before you attempt to claim back VAT on recent purchases, you need to know what you’re eligible to reclaim in the UK.

Here is a summary of the main things for which you can reclaim VAT:

• Business expenses: Goods and services you purchased for business activity, including things like office supplies, machinery and equipment, and professional services.
• Business travel: Various travel expenses on business-specific trips, such as accommodation, meals and transportation.
• Fuel and vehicle expenses: Any fuel, maintenance and other vehicle-related expenses incurred on behalf of your company’s work.
• Professional fees: Use of lawyers, accountants and other professional service providers to support your business needs.
• Advertising and marketing: Promotional activity and ad spend across various platforms/channels.
• Training and education: Training courses and educational programs for employees.

VAT reclaim limitations around entertainment and hospitality

There are strict limitations on claiming back VAT on entertainment and hospitality, especially for clients, so be sure of what is eligible. For example, meals, drinks, event tickets and other forms of hospitality are considered non-business expenses for VAT purposes. 

However, food, drinks and entertainment put on for employees, say, at a business event, may be eligible for VAT reclaim. Also, a sponsored event or business entertainment for overseas clients may offer exemptions to the restrictions. Read the government’s definition of entertainment in the context of business entertainment and VAT restrictions for more details.

It’s best to consult with your accountant or a tax specialist if you’re not sure about certain expenses you want to reclaim. Also, check out the dedicated page on reclaiming VAT on business expenses on the UK government’s website. 

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How to claim back VAT

Before embarking on VAT reclaim, make sure you have all the necessary documents and information ready. This will help streamline the process and increase your chances of success. 

Having the original VAT invoices, bills from your suppliers and receipts from business purchases that include VAT charges will help ensure accuracy and enable you to validate anything if asked to supply documentation.

Here are the main steps for how to claim back VAT:

• Step 1 – Check VAT registration and eligibility: Ensure your business is VAT-registered in the UK and that you’re eligible to reclaim VAT. You can only reclaim VAT on goods and services used strictly for business purposes.
• Step 2 – Collect the necessary documentation: Gather valid VAT invoices and receipts, proof of payment and any documents supporting eligibility (e.g. export evidence for zero-rated goods). HMRC requires detailed, compliant records to support any reclaim.
• Step 3 – Complete the appropriate VAT return or reclaim form: Most businesses reclaim VAT through their regular VAT return using the Making Tax Digital (MTD) system. If correcting past errors or using a special scheme (like the VAT refund scheme for overseas businesses), you may need to complete a specific VAT652 form or other applicable forms available on HMRC’s website.
• Step 4 – Submit your claim to HMRC: If using your regular VAT return, submit it digitally via your HMRC account. For error corrections or special reclaim schemes, send the form and supporting documents to the relevant HMRC team (e.g. VAT Error Correction Team), whose address is listed on the form. HMRC may request additional information during their review.
• Step 5 – Receive payment and retain records: If approved, HMRC will issue the refund, typically by bank transfer. If rejected, they will explain the reasons. You must keep all records for at least 6 years, as HMRC may review your claim during an audit or investigation.

Reclaiming VAT can provide significant financial benefits for businesses. By reclaiming VAT, you can reduce your overall tax liability and increase your cash flow. This extra cash can be reinvested in your business

‍How to reclaim VAT on exported goods

If you're based in the UK and you're hoping to get your VAT back on goods you've exported, here’s a breakdown of key considerations for VAT reclaim when exporting goods:

• Eligibility check – ensure you’re eligible to reclaim VAT (this applies to goods you've sent outside the European Union or to a non-EU country). 
• All about the paperwork – keep all your important documents together, including invoices, shipping documents and proof of export.
• VAT return time – now, it's time to submit a VAT return, so you'll need to include the value of the exported goods. 
• Form filling – you can do this online or use the VAT65A form. 
• Send your form to HMRC – this must be done within 4 years and 6 months from the end of the VAT period when the export occurred.
• HMRC will review your claim, which can take some time, and may request additional information or documents, (so please be patient).
• If everything goes well, your claim will be approved and you'll get your VAT refund, usually paid straight into your bank account. 

How to reclaim overpaid VAT

If you’ve submitted a VAT return and you think you’ve overpaid, you can rectify this online via your HMRC account. 

Here are the key details you need to know about how to reclaim overpaid VAT for your business:

• Visit the HMRC website and complete a VAT652 form, or request the form by calling the VAT Helpline.
• When you send your VAT652 form, include copies of important documents that prove overpayment, including invoices and receipts.
• Send your completed VAT652 form and supporting documents to the VAT Error Correction Team at HMRC by the stated submission time – you'll find the address on the form.
• Wait for the decision – HMRC needs time to review your claim and you may be asked to provide more information or documents.
• Record-keeping – keep copies of all documents related to the overpayment and the claim, as they may come in handy for future audits or inquiries.

Flexible short-term finance for VAT-related cash flow challenges

There are various finance solutions businesses can explore to help them pay their VAT and prevent cash flow gaps from impacting operations. These include VAT loans, business lines of credit and invoice finance. 

Also, the government offers Time to Pay (TPP) arrangements, which are payment plans that can be used for VAT to help businesses spread the cost and avoid late payment penalties.  

Iwoca is a leading business loan provider offering flexible loan solutions designed to support the needs of UK SMEs. You can use our loans to help cover your VAT bills and prevent tax obligations from causing cash flow gaps in key periods.

You can borrow between £1,000 and £1 million for a short period (several days, weeks or months) or as long as five years. Online applications take a matter of minutes, and you can get a funding decision within 24 hours. 

Also, we only charge interest on the funds you use, and you can repay the loan early, free of charge, which is ideal for short-term cash flow gaps when tax is due.‍

Ease your tax burden with iwoca Flexi-Loans

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Claiming VAT FAQs

What is VAT?

VAT (Value Added Tax) is a consumption tax applied to goods and services at each stage of production and distribution. It’s an indirect tax, meaning businesses collect it on behalf of the government, but the end consumer ultimately pays it as part of the final price.

For example, a farmer sells tomatoes to a wholesaler, who then sells them to a grocery store. At each step, VAT is added and passed along. While each business charges and pays VAT, only the final consumer bears the actual cost, ensuring the tax burden is shared across the supply chain.

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Who pays VAT?

Although VAT is collected by VAT-registered businesses, it’s ultimately paid by the end consumer, since it’s included in the final price of goods and services. Businesses act as intermediaries, collecting the tax and passing it to the government via periodic VAT returns. However, while all VAT-registered companies must pay their VAT bill, they can reclaim VAT on various business expenses.

Using the tomato example, a consumer buying tomatoes at the store pays a price that includes VAT. While the store collects and forwards this tax, consumers are the ones funding it. Registered businesses can usually reclaim the VAT they’ve paid on their own purchases, reducing their net tax burden.

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How is VAT calculated?

VAT is calculated by applying a specific percentage (the VAT rate) to the price of a product or service. The rate varies depending on the country and the type of goods or services. In the UK, the standard VAT rate is 20%.

To calculate VAT, multiply the product price by the VAT rate. A £100 product at 20% VAT would include £20 in tax. Some goods may be taxed at reduced or zero rates, such as food or healthcare, depending on national policies. Understanding these rates is key to accurate pricing and compliance.

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Can I claim VAT if I’m not VAT-registered?

No, only VAT-registered businesses can claim back VAT on purchases. If you're not registered, you must absorb the VAT as part of your costs.

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Can I defer VAT payments?

Yes, there are several circumstances where you can defer your VAT payments, such as in an asset finance agreement, when importing goods and after an unexpected event that has significantly impacted operations. Here are some examples:

• A leasing company can waive upfront VAT payments, agreeing to let you pay it after submitting your tax return. 
• During the global pandemic, when many businesses took a big hit to revenues, the UK government allowed various tax obligations to be deferred, giving companies breathing space.
• You can defer VAT payments when importing goods to the UK if you apply for a duty deferment account. This allows you to delay most customs and tax charges, such as customs and excise duties and import VAT. Instead, you set up a direct debit to pay monthly, rather than when importing the goods. 

Can charities claim back VAT?

Generally, charities can’t reclaim VAT on most purchases, as many of the activities carried out by charities are treated as non-business activities, like providing free services or relying on donations to fund various components of the organisation. 

However, in the UK, many charities are eligible for certain VAT reliefs or exemptions on specific goods and services. Also, some charities may be able to reclaim VAT under specific refund schemes, particularly if they're involved in activities funded by government grants.

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Can I claim VAT back as a sole trader?

Yes, if you are VAT-registered as a sole trader, you can reclaim VAT on business-related purchases.

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