VAT (It doesn’t have to be taxing) - Part 1

The reclaiming of VAT on employee expenses can be problematic and taxing (pun intended) for companies. For example, VAT can be reclaimed on the employee element of business entertaining but not on the client element.

VAT is a fundamental contributor to the UK economy. Tax receipts from VAT equated to £119.5bn for the financial year 2016/17 (HMRC, 2017). This equated to 21% of the UK government income for the year, the second most lucrative source. The tax gap (the difference between the amount of tax owed to the government versus the amount they receive) was £36bn for 2014/15. In recent years, this has led to a 29% surge in HMRC prosecutions resulting from tax investigations. Therefore, companies must ensure that they record accurate amounts as failure to do so may result in an HMRC investigation

SMEs, particularly, often do not have the time and resources to sift through hundreds of pages of HMRC guidance, which is frequently subject to change. Consequently, they are more likely to err on the side of caution and not reclaim VAT that they are legally entitled to, even more so when it comes to employee travel and expenses.

How can software help?

Expenses software can assist you with some of the confusing rules that govern VAT and empower your staff to understand the reasons behind some of the processes which could ultimately lower your VAT liability. An example of this is Employee/Client Entertaining Split. As mentioned, VAT can be reclaimed on your employees’ portion of an entertainment expense but not on the client portion. Therefore, if 3 of your employees went to a restaurant with 2 clients then only 60% (approximately) of the VAT can be reclaimed.

On a paper or Excel-based system, calculating this split can be a laborious task especially if there are many entertainment transactions per month. Expense management software like Zetadocs Expenses allows itemization of expenses to split out the VAT. This help you reclaim the correct amount of VAT and frees up time for your Finance Department to do more productive tasks.

There are many more ways that expense management software can help you manage VAT compliance and your own internal processes. Our next blog post will detail some of these.