As a business, you likely reimburse your employees for a range of business-related expenses they incur as part of their role within your organisation. But are you aware that you can reclaim the tax on many of these staff expenses? This can be a huge money saver for many businesses, especially SMEs.
A significant barrier to small companies claiming back VAT on staff expenses is that the process can be time-consuming and complicated. However, if your business is looking for ways to boost your bottom line, this could provide an opportunity to make considerable savings. In this article, we will look at what staff expenses businesses can claim back VAT on and the rules that apply.
What staff expenses can businesses claim the VAT back on?
Firstly, to claim back VAT on an employee’s expense, your employee needs to meet one of the following profiles:
- Be employed directly by your organisation
- Be a director, partner, or manager
- Self-employed hires (if paid the same way as permanent employees)
- Helpers or stewards working on your behalf during events or other business activities
As long as the expense was incurred by one of the above types of employee, and it was necessary for that staff member to carry out their work, you can usually make a claim. In order to make a claim, the expense should have been paid for directly by the employee and not by the business.
Here is an overview of the different types of staff expenses and whether you can or cannot claim VAT for them:
Employee travel expenses
Happily, one area you can claim back VAT on staff expenses is travel. This includes any business trips your staff make and covers meals, accommodation, and travel to and from the required work location.
When it comes to reclaiming fuel expenses, you will be able to reclaim the VAT as long as you can prove the trip and mileage claimed for was for business purposes. Any personal mileage cannot be claimed as a staff expense.
As a side note, if you pay your employees a flat rate for travel expenses such as a fixed amount per mile, you won’t be able to reclaim the VAT.
One area you cannot claim VAT is entertaining clients on behalf of your business. This is because it is not considered a necessary expense for any business.
However, if you are entertaining your employees to reward them and boost morale, you can reclaim the VAT on staff entertainment expenses. These include staff parties, ticketed events, concerts, and other events designed to be enjoyed by your workforce.
In addition, if your business holds annual staff events, for example, a Christmas party or summer fun day that is open to all employees and costs less than £150 per head, HMRC will refer to it as a qualifying event that is not considered a taxable benefit for your staff.
It’s important to understand that if you hold an event for staff that excludes some employees or costs over £150 per head, these will instead be considered taxable benefits that no VAT claims can be made for.
Purchase of tools, materials, and other sundry items
If your employee purchases any items that will be used for the sole benefit of the business and as part of their job role, these items can be included when making a VAT claim for staff expenses.
Setting out a staff expenses policy
To begin claiming VAT back on staff expenses, you should set out a staff expenses policy. You can use this policy to define what a staff member can claim as a business expense and how claims can be submitted. This will make the bookkeeping side of your business easier, and it will also provide clarity to your staff about what they can claim and any limits set out.
In order to claim back the VAT on staff expenses, you and your employees must follow a set process. At the end of the tax year, you will need to provide proof of the costs you want to claim back VAT on. This is why it is essential for your staff to document their business expenses and provide you with VAT receipts when they submit a claim to you. Running a tight ship when it comes to recording expenses will make things a lot easier when it comes to submitting a claim at the end of the tax year.
The bottom line
In the case of small and medium-sized businesses, it can be highly beneficial to take the time to understand when you can claim back the VAT on staff expenses so you can reap the benefits of any outstanding VAT claims.
If not already in place, we recommend setting out a clear employee expenses policy that applies across the board. This will give employees at all levels an understanding of what business expenses can be claimed for and the process they should follow to make a claim. In addition, by your employees following the process set out, you will have clear expense records, which will make the process of claiming back VAT on any qualifying expenses much more straightforward.
Read more from the myhrtoolkit blog
The 7 best HR cost-cutting strategies for small businesses
How much does an employee cost your business?
Written by Sarah Iqbal
Sarah Iqbal is a fully CIM qualified marketing executive and copywriter who specialises in business and finance writing. She regularly writes about how businesses can make profitable investments and use strategies to save on costs and boost revenue.