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Moving an employee to a new location can be costly. Fortunately, current HMRC rules let you reclaim the VAT on most relocation expenses under the “relocation concession” and pay up to £8,000 without creating a taxable benefit. This article explains in simple terms which costs qualify, how to document and submit your VAT reclaim, and how to stay within the tax and National Insurance exemption.
Understanding the VAT Relocation Concession
Qualifying Expenses : Invoices for legal fees, estate agent charges, removal and storage costs, temporary accommodation, appliance installation and house-hunting travel all attract VAT you can reclaim—even if the invoice is in the employee’s name.
Employer Obligations : You must reimburse the employee exactly the amount on each invoice, annotate it as “Reimbursed under VAT relocation concession,” and include the VAT as input tax in your return.
Applying the £8,000 Tax-and-NIC Exemption
What Qualifies: Since 2014, employers can cover up to £8,000 of relocation costs—VAT included—without triggering income tax or Class 1A National Insurance Contributions (NIC) on the employee. Qualifying costs mirror those eligible under the VAT concession.
Excess Payments: Any sum over £8,000 becomes a taxable benefit. The employee pays income tax on the excess, and you owe Class 1A NIC on that amount.
How to Reclaim VAT on Relocation Costs
Invoice Collection and Annotation: Gather every supplier invoice, have the employee hand them over, and write “Reimbursed under VAT relocation concession” across each before filing.
VAT Return Submission: In the VAT period, when you reimburse the employee, include the corresponding VAT as input tax. Ensure the reimbursement date aligns with the return.
Demonstrating Business Necessity
Commute Comparison: HMRC expects relocation to be “necessary for business,” typically when the new commute is significantly longer or your business premises move.
Documenting Reasons: Include a short memo comparing old and new commute distances or times and explaining why the move supports the employee’s role or your operations.
Avoiding Common Pitfalls
Lump-Sum Allowances: Flat cash payments without itemised invoices fall outside the concession and cannot be reclaimed or treated as tax-free.
Annual Reviews: Check HMRC Notice 700 each April for updates, and train your payroll and bookkeeping teams on annotation and filing procedures.
Call our office to talk to a specialist tax advisor for further advice.
Your Questions - Our Answers
We are here to help you with any questions you may have
Can I reclaim VAT if I receive a lump sum relocation allowance?
HMRC’s relocation concession requires a one-to-one match between each supplier invoice and the reimbursement. If you provide a flat cash allowance without collecting itemised VAT invoices, you cannot reclaim VAT on those costs.
The concession exists to treat relocation services as business expenses only when there is direct evidence—namely valid invoices—showing exactly what was paid and when. To benefit, make your reimbursement conditional on the employee submitting every relevant invoice in their name, and annotate each invoice before including the VAT in your return.
What documentation proves business necessity for a relocation?
To satisfy HMRC that a move is “necessary for business,” provide a brief written comparison of the employee’s old versus new commute—distance and travel time—and explain why the change was essential. For example, note if the employee needed to work from a client site, respond to new regional responsibilities, or if your office premises relocated. Include maps, journey planner printouts or transit schedules.
A short memo in your file, attached to the invoices, demonstrates that the primary purpose of the relocation was operational rather than personal, reducing the risk that HMRC will challenge your VAT reclaim.
How do I handle relocation costs that exceed the £8,000 limit?
Any qualifying relocation costs above £8,000 become a taxable benefit in kind. The employee must include the excess in their tax return and pay income tax at their marginal rate, while you, the employer, owe Class 1A National Insurance Contributions on that amount.
To manage this, monitor cumulative relocation reimbursements and notify the employee if their package approaches the threshold. Where possible, structure relocation packages so that only the first £8,000 is paid directly; any additional costs could be negotiated through other allowances or salary adjustments to minimise the tax impact.
What records should I retain, and for how long?
Keep all original supplier invoices, proof of reimbursement, and any memos about business necessity for at least six years. This time frame matches HMRC’s inspection period for VAT and benefits-in-kind enquiries.
Organise the files by employee and tax year and ensure digital backups are easily accessible. Proper records enable you to substantiate every element of your VAT reclaim and tax exemption claim if HMRC opens an enquiry, preventing delays, additional penalties or disallowed claims.
Will an accountant be capable of reducing my tax bill and helping me save money?
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Where can I find official HMRC guidance on relocation VAT and tax exemptions?
The primary reference for VAT on relocation expenses is HMRC’s Notice 700, which outlines the VAT reclaim. For income tax and NIC exemptions, see HMRC’s Employment Income Manual (EIM03104 onwards) covering the £8,000 relocation expenses exemption.
Both resources are available on GOV.UK and updated periodically—review them annually to ensure compliance with any legislative or interpretive changes.