Overview of VAT recovery on employee related expenses

By Tolley
VAT_tax_img10

The following Value Added Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Overview of VAT recovery on employee related expenses
  • What are employee expenses?
  • Subsistence expenses
  • Meals
  • Hotel stays
  • Employee entertainment
  • Business entertainment
  • Buying and selling cars
  • Leasing a car
  • Motoring expenses
  • Business gifts and samples
  • Staff expenses
  • Employee and directors accommodation
  • Removal costs
  • Clothing
  • Employee share schemes
  • Redundancy
  • Funded pension schemes

This guidance note provides an overview of when VAT can be recovered on employee related expenses.VIT40000; De Voil Indirect Tax Service V3.422 (subscription sensitive).

This guidance note provides an overview of when VAT can be recovered on employee related expenses.

VIT40000; De Voil Indirect Tax Service V3.422 (subscription sensitive)
What are employee expenses?

It is common practice for employees to purchase items and to be reimbursed by the employer for the costs incurred. Employers are entitled to recover the VAT incurred on the supplies made to employees in the following situations (this list is not exhaustive):

  • road fuel and other motoring expenses
  • subsistence expenses where an employee pays for meals and drinks, etc whilst away from their normal workplace on company business
  • removal expenses connected with employee relocation and staff transfers
  • purchase of sundry items, such as tools, materials, etc

If the employer can clearly demonstrate that the costs have been incurred for legitimate business purposes then the VAT incurred on the costs can be recovered.

Who can be treated as an employee?

It is very common for businesses to have a number of self-employed contractors who act in the same manner as an employee of the business. Historically HMRC has attempted to deny the business the right to recover VAT on the reimbursement of expenses to the self-employed members of staff. However, tribunal decisions have increasingly been decided in favour of the business so HMRC now accepts that costs incurred by these types of staff members can be recovered providing certain conditions are satisfied.

These conditions are that:

  • the individual is employed on the same basis as an employee (eg is paid on a fixed basis)
  • the individual incurs expenditure only in respect of their employment

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