Reclaiming VAT on your costs feels routine. A bill comes in, the VAT goes in the box, the return gets filed. Which is precisely why it is one of the easiest places in the whole tax system to go quietly wrong.
And here is the part that matters: if you reclaim VAT you were never entitled to, HMRC comes back to you. Not to your software, and not to whoever typed the invoice in. The VAT is repayable, interest is usually added, and penalties are possible where reasonable care wasn’t taken.
None of this is about being perfect. It is about a two-minute sense-check on the handful of costs that catch people out. Here are the ones we see most.
Why It Lands on You, Not Your Software
Bookkeeping software is very good at recording what you tell it. It is not an adjudicator of what is reclaimable. Code a bill to standard-rate VAT and the software will happily carry that VAT into your return — whether or not the VAT was ever charged, and whether or not it was ever recoverable.
Under Making Tax Digital the VAT return is still your declaration. The business submits it, so the business owns the error. That is why a quick review of the odd, borderline costs is worth far more than the few minutes it takes.
1. Utilities — Not Always 20%
The usual assumption is that a utility bill carries VAT at the standard 20%. Often it does. But not always:
- Some supplies qualify for the reduced 5% rate — for example low-usage supplies, or energy used for a domestic or charitable purpose. Businesses running from home, or from small premises, can find themselves here.
- Water is commonly zero-rated for many businesses, so there may be no VAT to reclaim at all.
The rule of thumb is simple: reclaim the VAT that is actually on the invoice, not the VAT you assume ought to be there. If a bill was charged at 5% and you reclaim 20%, you have overstated the claim — and the difference is exactly what HMRC will ask for back.
2. Overseas Costs — No UK VAT, Nothing to Reclaim
Software subscriptions, online advertising, overseas freelancers and suppliers: invoices from abroad frequently carry no UK VAT at all.
You can only reclaim UK VAT that has genuinely been charged to you. Where an overseas invoice shows no UK VAT — or shows a foreign sales tax instead — there is nothing to put in your reclaim box. Treating the gross figure as though it quietly included 20% UK VAT is a surprisingly common slip, and it inflates every return it appears in.
Some overseas services also fall under the reverse charge, where you account for the VAT and recover it on the same return. The net effect is often nil, but it still needs recording properly rather than being treated as an ordinary reclaim.
3. Client Entertainment — The VAT Stays Put
Lunch with a client, a round of golf, tickets to the rugby? The VAT on entertaining clients and customers is generally not recoverable — however commercially sensible the entertaining was.
Staff entertainment is treated differently, and VAT can often be recovered where the event is genuinely for employees. The trap is the mixed event, where staff and clients are entertained together: that position needs care rather than a blanket claim on the whole bill.
4. Leased Cars — Usually Only Half
Lease a car that is available for private use and you can normally recover only 50% of the VAT on the hire charge. The other half is blocked. For the overwhelming majority of company cars, that 50% restriction is simply the default.
Recovering the full amount is the exception, not the rule — it requires the car to be genuinely unavailable for private use, which is a high bar to clear and needs to be demonstrable. Vans and commercial vehicles are a different question altogether, and if it is a double-cab pickup, the classification has been shifting in recent years, so it is worth checking rather than assuming.
A Few More That Catch People Out
| Cost | Typical position | Watch out for |
|---|---|---|
| No valid VAT invoice | No claim | A card receipt or bank statement is not enough on its own — you need a proper VAT invoice to support the reclaim |
| Supplier isn’t VAT-registered | No VAT charged, so nothing to reclaim | An invoice can look entirely official and still carry no VAT at all |
| Insurance & most bank charges | Exempt — no VAT | Nothing to reclaim, however large the cost |
| Mixed business and private use | Reclaim only the business proportion | Broadband, fuel and similar costs used partly at home |
| Fuel with private mileage | Restricted | Keep the VAT receipts; the fuel scale charge may apply if you reclaim VAT on fuel used privately |
| Flat Rate Scheme | Generally no reclaim on day-to-day costs | Certain capital assets are the exception — the scheme has its own rules |
The sense-check: before you submit, look at the odd items — the overseas invoices, the utility bills, anything involving cars or entertaining. Ask one question of each: was UK VAT actually charged, and am I actually allowed to reclaim it? If the answer to either is “not sure”, leave it out until you have checked. Correcting a return before it goes is straightforward. Repaying years of over-claimed VAT with interest is not.
Let us take the guesswork out of VAT
VAT is a rules-heavy tax, and the liability for getting it wrong sits with you. As your ICAEW Chartered Accountant and bookkeeper, here is how I can help:
- Bookkeeping — costs coded correctly as they go in, rather than patched up at quarter-end
- VAT returns — prepared and reviewed before submission, with the borderline items actually checked
- A VAT health-check — a look back over recent returns for exactly the mistakes above
- Cars and entertaining — a straight answer on what you can and can’t reclaim, before you commit
- Ongoing — plain-English advice whenever a cost looks borderline
This post is intended as general guidance only. Always seek specific advice tailored to your own circumstances and refer to the latest HMRC guidance.