How to Claim VAT back on Business Purchases

If your business is VAT-registered, you must charge VAT on all products and services sold and remit the tax to HMRC. The advantage is that you can claim back the VAT you spent on business-related products. This step-by-step guide will follow you through the entire VAT reclaiming process, providing clear instructions and answers to some of the most often asked issues to help make the process simple and efficient for your business.

Who Can Claim Back VAT?

In the UK, VAT-registered businesses are eligible to reclaim VAT on purchases made for business use. Here’s who can claim VAT back:

  • VAT-registered Businesses: Businesses with VAT registration can reclaim VAT on taxable purchases and expenses.
  • Sole Traders: If you’re a sole trader and registered for VAT, you can also claim VAT back on business-related purchases.

How Does Claiming VAT Back Work?

Claiming VAT back involves offsetting the VAT you have paid on purchases (input VAT) against the VAT you have collected from your customers (output VAT). If the input VAT exceeds the output VAT, you are entitled to a VAT refund from HMRC.

To understand the distinction between input and output VAT in more detail, you can check our guide on What is Input and Output VAT?.

Steps to Claim VAT Back:

  1. Track VAT on Purchases: Keep invoices and receipts for all business-related purchases where VAT was paid.
  2. File VAT Returns: Submit your VAT return online, reporting input and output VAT for the period.
  3. Claim Excess VAT: If your input VAT is higher than your output VAT, HMRC will refund the difference.

Example:

  • You’ve collected £5,000 in VAT from customers (output VAT) and paid £3,000 in VAT on business purchases (input VAT).
  • You owe £2,000 to HMRC, but if your input VAT exceeded £5,000, you would be entitled to a refund for the difference.

How Do I Claim My VAT Refund? A Step-by-Step Guide

Follow this guide to claim your VAT refund from HMRC:

a) As a VAT-registered Business

  1. Complete Your VAT Return: Include all sales, purchases, and VAT amounts on your VAT return form.
  2. Review Your Purchases: Make sure you have kept detailed invoices and receipts for all business-related purchases.
  3. Check VAT Paid on Imports: If you’ve paid VAT on goods or services imported into the UK, ensure these are included in your claim.
  4. Submit VAT Return: Submit your completed VAT return via the HMRC portal. The return will include both output VAT (sales VAT) and input VAT (purchase VAT).
  5. Wait for Refund: If your input VAT exceeds your output VAT, HMRC will process your refund. The average refund processing time is 30 days.

b) As a Sole Trader

  1. Register for VAT: You must be VAT-registered to claim VAT back as a sole trader.
  2. Track Business Expenses: As a sole trader, ensure that your business expenses are recorded separately from personal expenses.
  3. Claim VAT on Purchases: Like VAT-registered businesses, claim VAT on business-related purchases such as supplies, equipment, and business services.
  4. File Your VAT Returns: Complete the VAT return form through HMRC’s online portal, reporting both your output and input VAT.
  5. VAT Refund: If your input VAT exceeds the output VAT, HMRC will process the refund as part of your VAT return submission.

When Can You Claim VAT Back?

You can claim VAT back during each VAT period (usually quarterly or annually), but there are some rules about when you can make a claim:

  • Claim within Four Years: Generally, you can reclaim VAT on business purchases for up to four years after the transaction, as long as the goods or services were for business use.
  • Claiming VAT on Capital Assets: For larger items like machinery, vehicles, or buildings, you may be able to reclaim VAT for up to 10 years after the purchase.

Note

VAT on purchases made before you were VAT-registered cannot be reclaimed.

Does HMRC Automatically Refund VAT?

No, HMRC does not automatically refund VAT. You must submit a VAT return that details your input and output VAT for the period. If the VAT paid on purchases (input VAT) exceeds the VAT you’ve collected from customers (output VAT), HMRC will process the refund manually.

  • Refund Processing: Once you submit your VAT return, HMRC typically processes refunds within 30 days.
  • Payment Methods: VAT refunds are paid directly to your business bank account.

Benefits of Claiming VAT Back

Claiming VAT back offers several financial advantages for businesses:

  • Improved Cash Flow: By reclaiming VAT on business purchases, you can improve your business’s cash flow, allowing more capital for operations or investment.
  • Reduced Operational Costs: Reclaiming VAT on items such as office supplies, equipment, and services reduces the overall cost of doing business.
  • Better Financial Planning: Incorporating VAT refunds into your financial strategy helps manage expenses and forecast cash flow more accurately, boosting overall business efficiency.

Conclusion

Claiming VAT back on business purchases can provide significant financial relief, especially for VAT-registered businesses and sole traders. By following the steps outlined in this guide and maintaining accurate records, you can ensure a smooth process for claiming VAT refunds.

Key Takeaways:

  • Track all business purchases and keep detailed records.
  • Submit VAT returns on time to avoid penalties.
  • If you are due a refund, HMRC typically processes it within 30 days.

If you are unsure or need assistance with your VAT returns, consider using accounting software like QuickBooks or Xero, which can automate the process and help keep you compliant.

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