VAT is notoriously tricky terrain, and HMRC - overstretched and understaffed - tries its best, but can’t offer you all the guidance you need.
At the same time, while you try to get your VAT compliance dead on, you might miss chances to reclaim VAT on your expenses. That’s money you could put back into your budget. When CFOs and FDs are under pressure to do more with less, every bit helps.
So how can you get your tax compliance right and uncover money that could be going to waste? We spoke to VAT expert Neil Warren, who offered three good places to start.
Subsistence and business entertainment
The key thing with subsistence is that the employee is away from their main place of business. Okay, that’s obvious -- but what exactly counts as away. “I’ve always advised five miles or more because when I worked in the VAT office at HMRC, if we were more than five miles away from our office we could expense our lunch.”
But then, when does a lunch become entertaining a client? If you’ve got a sales rep away from the office and they have a meal with a customer, is that classed as wholly entertaining and non-VAT deductible? Or is part subsistence or part entertainment?
“So entertainment is basically hospitality which involves free food or free drink. That is, the customer or client isn’t paying for his meal or his trip to the football. Entertainment essentially means free hospitality.
“Subsistence means you’re away from your place of work and you’re incurring expenses.”
“What’s deemed subsistence is wholly down to the business. If the policy is you’re only allowed a meal at McDonald’s up to £10, that’s their accounting policy. If the employee has a five-course meal at the Ritz and the company allows it, that’s absolutely fine, too.”
So what does HMRC expect from businesses when it comes an expenses policy? “They’re not going to spend a lot of time digging through petrol receipts to ensure every technical point is kept to,” Warren explained.
“HMRC has gone from 98,000 to 45,000 employees in the last decade. They do a lot less compliance work now. When they do, they focus on high-risk areas: large repayment returns, partial exemption, property deals.”
According to Warren, the key thing is a good system and internal controls; if the system is sound for employees to do their claims and submit their receipts. “HMRC is more interested in systems than detailed transaction checking,” he added.
Let’s say a UK construction firm has got a big building job in France, and while it’s in France, its workers have to stay in hotels and the company hire equipment and transport, etc. They’ll incur French VAT, but they can’t reclaim that on UK VAT because it’s not a British VAT return.
“So they have to do this special online repayment claim which goes through HMRC and goes onto the French tax authority as a separate claim.”
That’s for when you’re in the EU. But what if you’ve got business in a country outside the EU, we let them reclaim any VAT they incur in the UK through the EU’s 13th directive. “And equally, if our businesses incur Goods and Services Tax [their VAT] in Australia, we can reclaim that. It’s a reciprocal arrangement.”
Unlike normal VAT reclaims on expenses, most 13th directive issues are dealt with paper claims and returns. “The form that we use in the UK is the Form 65A,” said Warren.
In the case of EU VAT, the expenses up to 31st december, they’ve got to submit the claim by 3rd sept. It’s a nine month window. Non-eu, the claim period is until 30 June, and they have to get the paperwork in by 31st of December.
Neil Warren will join AccountingWEB on Thursday, 15 March at 11am to answer your questions on expense management, compliance and VAT reclaim. Click here to register.
About Francois Badenhorst
I'm AccountingWEB's business editor. Feel free to get in touch with comments, tips, scoops or irreverent banter.