VAT Claim on Private Use

HMRC’s guidance on reclaiming VAT when your company pays or reimburses household costs for employees, directors, or others is ambiguous. In practice, it allows a VAT claim on domestic operating costs, such as maintenance and upgrades, as long as they are related to business usage.

Example

Mark is a director and shareholder of AA Ltd, a business he manages from his living room. AA Ltd reimburses Mark 30% of his household costs, such as energy, phone, broadband, other overheads, and repairs. AA Ltd can reclaim the VAT on these items, but only to the extent that they were used for business purposes. If Mark were an employee rather than a director, the situation would be the same.

The mere fact that your company uses it for business purposes does not entitle you to a VAT refund. It must pay the provider directly or reimburse the employee or director, for example, to incur at least the comparable expense.

The approach for calculating how much VAT may be recovered for domestic costs is the same as it is for any other expense with a mix of business and non-business use. Apportionment must be done that results in a value that is “fair and reasonable.” In other words, you may make an educated guess.

Despite stating that such VAT can be reclaimed, HMRC’s guidance is unclear on what documentary proof it expects to support a claim. We recommend that an employee, director, or other person submit a copy of the household expenses and a “fair and reasonable” assessment of the business-related amount to the business. Keep a copy (or original) of the bill and a note explaining why 100 per cent of the VAT is business-related and can be reclaimed, for example, if the expenditure is for refurbishing a room used solely for business.

Calculating a reasonable and fair amount

For a non-recurring purchase, the fair and reasonable amount calculation only has to be done once. For example, if you paid £480 for a year’s supply of stationery, which included £80 in VAT, and you anticipated to use 20% of it for personal use, you may reclaim £64 of the VAT, or £80 less 20%. That’s a reasonable and fair outcome. There is no need to adjust the original calculation if your private use turns out to be 30% or 10%.

For each VAT quarter, the fair and reasonable amount for recurrent purchases should be calculated. For example, for the business supply of broadband, telephone, and related services, you pay £240 per month, including £40 in VAT. Your usage of the services for business and non-business purposes differs. When preparing your VAT numbers, you must make a fair and reasonable calculation of the business and non-business use in a quarter. In practice, however, if the amount of VAT involved is minor, HMRC will typically accept the same apportionment.