Your firm is relocating premises and spending a lot on refurbishments including fancy furnishings and artwork for the offices. A colleague has said you might not be entitled to reclaim VAT on some of these costs. Are they right?
If you’re VAT registered and buy goods or services for use in your business, you can reclaim the VAT paid on them with some exceptions. For example, while there’s no distinction between VAT on purchases of capital items, e.g. equipment, compared with VAT on day-to-day costs like overheads, there are special rules for expensive purchases such as land and buildings.
Related to taxable supplies
VAT can only be reclaimed if there’s wholly or partly a business purpose which in turn is clearly linked to making VATable sales. Example. Acom Associates pays the membership fees to a private club for each of the business owners. They argue that the VAT on the club fees is reclaimable as they are only members because it gives them access to influential contacts who can help Acom’s business. HMRC won’t accept that this factor alone entitles Acom to reclaim the VAT.
According to HMRC there must be a clear and direct link between the cost and VATable sales. However, what counts as a clear and direct link is open to debate especially when other issues, such as private use of a purchase, are involved.
Private benefit, motive and purpose
In practice, just because personal benefit is derived from a purchase does not prevent you from recovering VAT or restrict the amount you can reclaim. You might spend thousands of pounds on office furnishings, wallpaper and carpets when a trip to Ikea would have netted you everything you needed for a fraction of the price. This too doesn’t matter when reclaiming VAT . What does matter is why you spent the money at all.
Trap. Unwarranted luxury can be a stumbling block for income and corporation tax deductions (but not VAT). We’ll look at this in detail in another article.
The VAT legislation isn’t much help in determining if VAT can be reclaimed on purchases that don’t have an obvious link to a business’s sales. The courts have therefore developed criteria. Broadly, their view is that it’s the buyer’s intention at the time of purchase that’s the key factor. In Folkestone Harbour (GP) Ltd v HMRC 2015 the court ruled that VAT paid on the cost of constructing a decorative fountain could be reclaimed because the intention was to attract customers, in effect advertising, which has a clear and direct link to sales. Whether or not the fountain achieved this goal was not significant.
Rule of thumb
The right to reclaim VAT isn’t whether the goods or services you buy are luxury items, from which you might derive some personal pleasure, it’s their intended use in your business that’s important. Even if in practice the purchases don’t fulfil your intentions you aren’t required to repay any of VAT you’ve reclaimed. Luxury is fine as long as it had a clear business motive at the time of purchase.
It’s the motive at the time of purchase that determines if VAT can be reclaimed. Whether or not it’s a luxury item or service is irrelevant. This means if you bought something for private reasons alone and later use it for your business you can’t then reclaim the VAT but the converse is also true.
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.