Reclaiming VAT on staff homeworking allowances

You’re downsizing your office and have asked a few staff to permanently change to homeworking. You’ll pay them a one-off allowance towards the cost of setting up their home workspace. Can you reclaim the VAT they incur?

Is it a business expense?

Bar-room accountants like to suggest that “putting it through the business” will get you a tax deduction for a wide variety of expenses. In practice, this has no bearing on your right to tax relief or to reclaim VAT. The basic rule for VAT is that it can only be reclaimed if the expense had a business purpose. Furthermore, the expense must be linked to VATable supplies your business makes.

Trap. VAT paid which results in exempt supplies, or is linked to non-business or private use, can’t be reclaimed even if it benefits your business.

Example. Hugh is a solicitor and keen golfer. He puts his club membership fees through his business as he says golf helps generate contract and get more clients for his legal practice. Whether or not this is true is irrelevant. The purpose of the expenditure is a private one and so the VAT paid on the membership fee can’t be reclaimed.

Evidence of VAT paid

An allowance paid by your business to one of its employees may or may not meet the basic rule for VAT claims. Working for now on the assumption that it does, before you can reclaim it you’ll still need evidence, usually a valid invoice or receipt which shows that VAT has been paid.

Tip. Receipts and invoices in an employee’s name are, contrary to common belief, acceptable to HMRC as evidence as long as they are passed on to you by the employee. It’s advisable to get your employee to formalize this by attached the invoices etc. to a corresponding expenses claim.

Is it a business expense?

Trap. VAT paid which results in exempt supplies, or is linked to non-business or private use, can’t be reclaimed even if it benefits your business.

Evidence of VAT paid

Tip. Receipts and invoices in an employee’s name are, contrary to common belief, acceptable to HMRC as evidence as long as they are passed on to you by the employee. It’s advisable to get your employee to formalize this by attached the invoices etc. to a corresponding expenses claim.

Who received the supply?

If an allowance you pay an employee is used by them to buy goods for their new home office, e.g. a desk, chair, shelves, etc. It’s important that ownership of these items belongs to your business. You should therefore make this position clear to the employee.

Trap. If ownership is with your employee it’s they and not your business who has received the supply and so the basic rule mentioned isn’t met and you won’t be entitled to reclaim the VAT.
Trap. HMRC’s view is that if you pay an employee an allowance which they use to decorate or improve their home, you can’t reclaim the corresponding VAT. It’s a private expense because the decoration is attached to the property which belongs to the employee and so they own it.
Tip. If the cost of home decoration, or any other purchase, counts as a taxable benefit in kind for income tax purposes, it makes the expense a business rather an a private one because it counts as part of your employee’s remuneration, which is a business expense. In that case, you can reclaim the VAT but you’ll need to account for VAT on the value of private use, unless it is incidental to the business use.

Evidence of VAT paid

Tip. Receipts and invoices in an employee’s name are, contrary to common belief, acceptable to HMRC as evidence as long as they are passed on to you by the employee. It’s advisable to get your employee to formalize this by attached the invoices etc. to a corresponding expenses claim.

Who received the supply?

Trap. If ownership is with your employee it’s they and not your business who has received the supply and so the basic rule mentioned isn’t met and you won’t be entitled to reclaim the VAT.
Trap. HMRC’s view is that if you pay an employee an allowance which they use to decorate or improve their home, you can’t reclaim the corresponding VAT. It’s a private expense because the decoration is attached to the property which belongs to the employee and so they own it.
Tip. If the cost of home decoration, or any other purchase, counts as a taxable benefit in kind for income tax purposes, it makes the expense a business rather an a private one because it counts as part of your employee’s remuneration, which is a business expense. In that case, you can reclaim the VAT but you’ll need to account for VAT on the value of private use, unless it is incidental to the business use.

You can reclaim VAT on expenses incurred by your employees for creating a home workspace. You must have the original receipts and invoices to show that VAT has been paid. Ask your employees to attach them to an expenses claim. If there’s any private use of the home office, you might need to account for VAT on this.If an allowance you pay an employee is used by them to buy goods for their new home office, e.g. a desk, chair, shelves, etc. It’s important that ownership of these items belongs to your business. You should therefore make this position clear to the employee.

Trap. If ownership is with your employee it’s they and not your business who has received the supply and so the basic rule mentioned isn’t met and you won’t be entitled to reclaim the VAT.
Trap. HMRC’s view is that if you pay an employee an allowance which they use to decorate or improve their home, you can’t reclaim the corresponding VAT. It’s a private expense because the decoration is attached to the property which belongs to the employee and so they own it.
Tip. If the cost of home decoration, or any other purchase, counts as a taxable benefit in kind for income tax purposes, it makes the expense a business rather an a private one because it counts as part of your employee’s remuneration, which is a business expense. In that case, you can reclaim the VAT but you’ll need to account for VAT on the value of private use, unless it is incidental to the business use.

Trap. VAT paid which results in exempt supplies, or is linked to non-business or private use, can’t be reclaimed even if it benefits your business.

Evidence of VAT paid

Tip. Receipts and invoices in an employee’s name are, contrary to common belief, acceptable to HMRC as evidence as long as they are passed on to you by the employee. It’s advisable to get your employee to formalize this by attached the invoices etc. to a corresponding expenses claim.

Who received the supply?

Trap. If ownership is with your employee it’s they and not your business who has received the supply and so the basic rule mentioned isn’t met and you won’t be entitled to reclaim the VAT.
Trap. HMRC’s view is that if you pay an employee an allowance which they use to decorate or improve their home, you can’t reclaim the corresponding VAT. It’s a private expense because the decoration is attached to the property which belongs to the employee and so they own it.
Tip. If the cost of home decoration, or any other purchase, counts as a taxable benefit in kind for income tax purposes, it makes the expense a business rather an a private one because it counts as part of your employee’s remuneration, which is a business expense. In that case, you can reclaim the VAT but you’ll need to account for VAT on the value of private use, unless it is incidental to the business use.

Kelly AnsteeJuly 16, 2021Taxswag