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You may use some of the goods and services that you buy for your business for both business and non-business use. You can generally only reclaim VAT on the proportion of these items used for business purposes. For example if you buy a computer and use it 50 per cent for your business and 50 per cent for private use, you can only reclaim 50 per cent of the VAT. Normally you would simply reclaim that proportion of VAT on your VAT return. In some very limited situations you can reclaim all the VAT and then pay back the proportion of VAT used for non-business purposes. The rules that apply to motoring expenses and road fuel are different.
This guide will show you how to calculate the business use proportion of an item and how to reclaim that proportion of VAT.
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If you buy goods or services that you use for both business and non-business purposes, you can only reclaim VAT on the proportion of the item that you use for business purposes. Non-business purposes include items for private or charitable use.
If you buy goods or services that you use only for non-business purposes, you cannot reclaim any VAT.
This distinction is important as the VAT on the cost of these goods and services can only be reclaimed if they are exclusively for business use. If the goods or services will also be for non-business use, the correct percentage of the cost must be accurately calculated to ensure you are claiming back the right level of input VAT. This is called apportionment.
x% business use = you can only reclaim x% of the VAT
A good example is if you buy a mobile phone for your business. If you only use it for a third of the time for business purposes, you can only reclaim a third of the VAT on purchase and service plans.
There are two main methods you can use to reclaim the VAT on the business element of goods or services used for both business and non-business purposes.
Generally speaking you must apportion the VAT on services. The VAT on goods can either be apportioned or, in some very limited situations, you can use the reclaim and pay back the VAT method.
Using this form of calculation is the easiest and most straightforward. For example, if you buy a computer and only use this for business purposes or 20 per cent of the time, you can only claim 20 per cent of the VAT back. If you work from home, use your study 50 per cent for business and redecorate it, you can reclaim 50 per cent of the VAT.
With this method you reclaim all the VAT on the item and then make an adjustment within the tax year to account for the proportion of the item that was used for non-business purposes. For example, if you bought a DVD player that you use half for business and half for private, you reclaim 100 per cent of the VAT you paid. You then add the 50 per cent of the VAT that is attributable to private use onto your VAT due (output tax) at a later VAT return.
HM Revenue & Customs (HMRC) has no hard and fast rules on how you calculate the proportion of VAT to reclaim. As every business is different you can devise any fair and reasonable method to calculate the proportion of an item that is used for business purposes.
The important point to remember is that whatever method you use, you need to keep records to show how you calculated the proportion of business and private use on these items and how the items have been actually used. You should be prepared to justify your method to HMRC when you have a VAT inspection. You can also agree a particular method for a particular item with HMRC.
Some ways in which you can calculate and keep records of how you apportion business use include:
Generally you can reclaim all of the VAT on motoring expenses even if your car is used privately as well as for business purposes. There are several options you can choose from to calculate the proportion of VAT that you can reclaim on the private use of road fuel.
If you buy or sell some goods or services that are VAT taxable and some that are exempt from VAT, you must first calculate how much VAT you can treat as reclaimable (input tax) before you carry out any partial exemption calculations.
Charities and other not-for-profit organisations need to be clear about organising their income and expenses, because their activities will often be a mixture of both business and non-business.