Overview of VAT recovery on employee related expenses

By Tolley
Overview of VAT recovery on employee related expenses

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?
  • Can VAT be claimed on subsistence expenses?
  • Can VAT be claimed on business and employee entertainment?
  • Can VAT be claim on employee motoring related expenses?
  • Can VAT be claimed on employee gifts?
  • Can VAT be claimed on staff expenses?
  • Can VAT be claimed on employee and director’s accommodation?
  • Can VAT be claimed on removal costs?
  • Can VAT be claimed on clothing?
  • Can VAT be claimed on employee share scheme costs?
  • Can VAT be claimed on redundancy costs?
  • Can VAT be claimed on employee pension schemes?

This guidance note provides an overview of when VAT can be recovered on employee related expenses. This note should be read in conjunction with the What is input tax and Evidence for claiming input tax guidance note. Further information on other expenses that could be employee related can be found in the Reclaiming input tax on miscellaneous expenses guidance note.

VIT40000; De Voil Indirect Tax Service V3.422
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 that the following conditions are satisfied.

  • the individual is employed on the same basis as an employee (eg is paid

More on Claiming input tax: