How Do I Reclaim VAT on Business Purchases?

VAT-registered businesses can reclaim VAT on eligible purchases. Learn what you can claim, how to file correctly, and how to avoid common VAT reclaim mistakes.

Introduction

If your business is VAT registered, one of the key advantages is the ability to reclaim VAT paid on goods and services used for business purposes. This process can save you significant money, but it requires accurate record keeping and an understanding of HMRC’s rules.

Reclaiming VAT, also known as input tax, allows you to deduct the VAT you pay on purchases from the VAT you charge on your sales. This article explains what you can reclaim, how to make a claim, and the common pitfalls to avoid when claiming VAT on business expenses.

When You Can Reclaim VAT

You can reclaim VAT on goods and services that are used exclusively for business purposes and where you hold a valid VAT invoice. This includes VAT on:

  • Stock and raw materials.

  • Office equipment and furniture.

  • Professional services such as accountancy, legal advice, or consultancy.

  • Travel, marketing, and advertising costs.

  • Utility bills and rent if they relate to your business premises.

However, you cannot reclaim VAT on items used for personal purposes, or if your business is not VAT registered.

If your business makes both taxable and exempt sales (known as partial exemption), you can only reclaim VAT on the portion of expenses used for taxable business activity.

What You Need to Reclaim VAT

To reclaim VAT, you must:

  1. Be VAT registered with HMRC.

  2. Hold a valid VAT invoice showing the supplier’s VAT number, the amount of VAT charged, and a description of the goods or services.

  3. Record all purchases accurately in your accounting records.

You claim VAT by including it in your VAT return, which is usually filed quarterly. The VAT return calculates the difference between the VAT you charge on sales (output tax) and the VAT you pay on purchases (input tax). If input tax exceeds output tax, HMRC will issue a refund.

How to Reclaim VAT Step by Step

  1. Collect VAT invoices
    Ensure every purchase has a valid VAT invoice. HMRC will not accept credit card receipts or simple statements as evidence.

  2. Record transactions
    Keep detailed records of all purchases, noting the VAT amount separately. If you use accounting software, it will automatically track VAT entries.

  3. Complete your VAT return
    Include all input VAT amounts in your VAT return under the relevant boxes. Your software or accountant can calculate your reclaim automatically.

  4. Submit to HMRC
    Submit your VAT return through your accounting software or via HMRC’s Making Tax Digital (MTD) system.

  5. Receive a refund
    If your input VAT is greater than the VAT you charged customers, HMRC will issue a repayment directly to your business bank account, usually within 10 working days.

Reclaiming VAT on Pre-Registration Purchases

You can reclaim VAT on certain goods and services purchased before you registered for VAT, provided they were used for your business and you still own them.

The rules allow you to reclaim:

  • VAT on goods bought up to four years before registration, if you still hold them or they form part of your stock.

  • VAT on services bought up to six months before registration, as long as they relate to your business activity.

To make this claim, include the amounts in your first VAT return and keep detailed records showing the date and purpose of each purchase.

Reclaiming VAT on Mixed-Use Items

If an expense is used for both business and personal purposes, you can only reclaim the business portion.

For example:

  • A phone bill used 70% for business and 30% personally allows you to reclaim 70% of the VAT.

  • If a company car is used partly for personal use, you must restrict your claim accordingly or apply the appropriate scale charge for fuel.

VAT on Business Entertainment

In most cases, you cannot reclaim VAT on business entertainment provided to clients, customers, or suppliers. HMRC defines entertainment broadly, including food, drink, accommodation, and hospitality.

However, you can reclaim VAT on expenses for:

  • Staff entertainment, such as annual parties.

  • Meals and travel costs when employees are away on business.

Common Mistakes to Avoid

  1. Claiming VAT without a valid invoice HMRC requires proper documentation for all claims.

  2. Including personal expenses Only business-related costs qualify.

  3. Missing pre-registration claims Many businesses forget to reclaim VAT from before they registered.

  4. Overclaiming on partial exemption If you have both taxable and exempt supplies, you must use an approved partial exemption method.

  5. Forgetting to adjust for refunds or discounts If a supplier gives you a credit note, you must reduce your VAT claim accordingly.

Example Scenario

Sophie runs a VAT-registered marketing agency. During the last quarter, she bought:

  • Office furniture for £1,200 including £200 VAT.

  • A new laptop for £1,800 including £300 VAT.

  • Travel expenses for £600 including £100 VAT.

Her total input VAT for the quarter is £600. On her VAT return, she reports £2,400 output VAT charged to clients. HMRC calculates:

£2,400 (output tax) £600 (input tax) = £1,800 payable to HMRC.

If Sophie’s input VAT had been higher than her output VAT, she would have received a refund instead.

Record Keeping Requirements

You must keep all VAT records and invoices for at least six years. These should include:

  • Sales and purchase invoices.

  • Credit and debit notes.

  • VAT account and returns.

  • Evidence of pre-registration or partial exemption claims.

Digital record keeping is now mandatory under Making Tax Digital (MTD), meaning you must store VAT data electronically using compatible software.

The Role of an Accountant

An accountant or bookkeeper can help you:

  • Identify which purchases qualify for VAT recovery.

  • Prepare and submit accurate VAT returns.

  • Handle partial exemption calculations.

  • Manage pre-registration claims.

  • Deal with HMRC queries or inspections.

Professional guidance ensures you do not overclaim VAT, which could result in penalties, or miss legitimate claims that reduce your costs.

Conclusion

Reclaiming VAT on business purchases can improve cash flow and lower your overall costs, but it requires accurate record keeping and compliance with HMRC’s rules. You can reclaim VAT on goods and services used for your business, including certain pre-registration expenses, provided you have valid invoices.

Make sure to keep proper digital records, check for mixed-use costs, and understand which items are excluded. With the right systems in place — or help from an accountant — VAT reclaims can become a simple and beneficial part of your regular tax process.