How to claim back VAT: a step-by-step guide
What is VAT?
VAT stands for Value Added Tax, which is a consumption tax that is levied on goods and services. It is an indirect tax, meaning that it is ultimately paid by the end consumer. VAT is charged as a percentage of the price of a product or service and is added to the final sale price.
Imagine a scenario where a farmer grows tomatoes. The farmer sells the tomatoes to a wholesaler, who then sells them to a grocery store. The grocery store then sells the tomatoes to the end consumer.
At each stage of this process, VAT is applied. The farmer charges VAT when selling tomatoes to the wholesaler, who then charges VAT when selling them to the grocery store. The grocery store also charges VAT when selling the tomatoes to the end consumer.
This means each party in the supply chain passes the VAT. Each party collects and pays the tax to the government. VAT makes sure everyone in the production and distribution process shares the tax burden equally.
Who Pays VAT?
In most cases, VAT is paid by businesses that are registered for VAT purposes. Yet, it is important to note that end consumers bear the cost of VAT, as it is included in the final price they pay for goods and services.
Let's go back to our tomato example. The end consumer who buys the tomatoes from the grocery store pays the VAT included in the final sale price. While the grocery store collects the VAT, it is ultimately the consumer who shoulders the tax burden.
It's worth mentioning that businesses registered for VAT can usually claim back the VAT they have paid on their purchases. This helps to reduce the burden of VAT on businesses and ensures that the tax is only paid once by the end consumer.
How is VAT Calculated?
VAT is calculated as a percentage of the price of the product or service. The VAT rate can vary depending on the country and the type of goods or services being sold. For example, in the UK, the standard rate of VAT is currently 20%.
Calculating VAT is relatively straightforward. To determine the VAT amount, you multiply the price of the product or service by the VAT rate. For example, if a product costs £100 and the VAT rate is 20%, the VAT amount would be £20.
It's important to note that some goods and services may be subject to different VAT rates or exemptions. For example, important things like food and healthcare might have lower VAT rates or no VAT at all.
Furthermore, some countries may have many VAT rates, such as a standard rate, reduced rate, and zero rate. These different rates reflect the varying levels of taxation applied to different goods and services.
Understanding how VAT is calculated is essential for businesses and consumers alike. It allows for accurate pricing and ensures compliance with tax regulations.
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
How far back can you reclaim VAT?
You can generally reclaim VAT on purchases made within the previous 4 years. There are certain exceptions and conditions that may apply though. For example, if you have 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).
What can you reclaim VAT on?
You can reclaim VAT on the following:
- Business expenses: goods and services that you purchased for your business activity. This includes office supplies, equipment, and professional services.
- Business travel: travel expenses such as accommodation, meals, and transportation.
- Fuel and vehicle expenses: fuel, maintenance, and other vehicle-related expenses.
- Entertainment and hospitality: client entertainment and hospitality.
- Professional fees: lawyers, accountants, and other professional service providers.
- Advertising and marketing
- Training and education: training courses and educational programs for employees.
If you have any questions, you can check out the special section on the government’s website. Go to https://www.gov.uk/charge-reclaim-record-vat/reclaim-vat-business-expenses.
How to claim back VAT
Before you embark, it is important to ensure that you have all the necessary documents and information ready. This will help streamline the process and increase your chances of a successful VAT reclaim. Make sure you have the Original VAT invoices. These are just the usual bills from your supplier that include VAT charges.
- First, verify if your business is registered for VAT and eligible to reclaim VAT. This could be because of overpayment or exporting goods outside the EU.
- Collect the required documents: VAT invoices, payment evidence, eligibility proof, and export proof if needed.
- In case you have already submitted a VAT return that reflects the overpayment, you can rectify the VAT return online via the HMRC website.
- Locate and fill out the suitable VAT reclaim form from the HMRC site based on the scheme you're using. The form will ask for business details, VAT figures, and supporting documents.
- After filling out the VAT reclaim form, send it along with the necessary documents to the VAT Error Correction Team at HMRC. The address is provided on the form. Wait patiently as HMRC carries out a detailed review of your claim, and be ready to provide extra information or documentation if asked.
- Upon approval, a refund will be arranged by HMRC, typically directly into your bank account. If your claim is denied, you will receive an explanation. Lastly, it is very important to save your records. Keep copies of all documents related to your claim. This will help in case of future audits or inquiries.
And there you have it. 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 into 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 on how you could make things work:
- Eligibility Check: you'll want to make sure you can actually 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. This includes invoices, shipping documents, and proof that the export happened.
- VAT return time: now, it's time to submit a VAT return. 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 off to the UK tax authority. Try to do this within 4 years and 6 months from the end of the VAT period when the export happened.
- The tax authority will look over your claim and they might ask for more information or documents. It could take a little while, so hang tight!
- If everything goes well, your claim will be approved and you'll get your VAT refund. This will usually be paid straight into your bank account.
How to reclaim overpaid VAT
First of all and if you directly jumped onto this section, check that you’re eligible to claim back VAT. Are you a VAT-registered business? Have you paid more VAT than expected? If so, you can start your journey to reclaim overpaid VAT.
- Document Round-up: gather all your important documents - invoices, receipts, and more. These are the golden tickets to prove your overpayment.
- If you made a mistake on your VAT return, go to the HMRC website and fix it.
- You can complete a VAT652 form, which is available for download from the HMRC website or can be requested via the VAT Helpline.
- When you send your VAT652 form, include copies of important documents to prove overpayment. Remember, the originals are treasures so keep them safe.
- Send your completed VAT652 form and supporting documents to the VAT Error Correction Team at HMRC by the submission time. You'll find the address on the form.
- Wait for the decision: HMRC needs time to review your claim. They might ask for more information or documents. Once processed, they'll either approve and send your refund, or provide an explanation if the claim is rejected.
- Record-Keeping: make sure to keep copies of all documents related to the overpayment and the claim. You'll thank yourself during future audits or inquiries.
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