VAT on employee expenses: 10 quirks you might not know
When you are processing your staff expenses claims it is important to go through and make sure that the correct VAT treatment has been applied in each case.
VAT rules are complicated and there are all sorts of quirks that crop up from time to time, especially with VAT on employee expenses.
We’ve picked out a few key rules to give you a taste but the overall message has to be that, with mastering VAT, you need to be really careful that you are treating expenses correctly.
4 minutes
Written by Steve Thomas, Finance Software and Systems Specialist
Cable cars
Usually, travel costs are standard rated or zero-rated.
If you take a taxi with a large firm then you’ll be paying VAT on the cost of the journey at 20%.
But if you take the train or underground then you’ll pay no VAT.
But what about cable cars?!
Surprisingly, (and we can’t think why this would be) there are a series of modes of transport that are charged at the reduced rate (5%).
This includes cable cars!
Now we admit that it is unlikely that your staff will be recharging a cable car on expenses but with the Emirates Cable Car now up and running in London who knows?
Monster Munch, Skips and Twiglets
Your staff might be in the habit of visiting supermarkets and buying food that they later claim back as subsistence and often there will be one of these tasty snacks on the receipt.
But did you know that not everything that looks like a crisp actually is one?!
And for VAT purposes these are treated differently.
Monster Munch, along with many other savoury crisps, are standard rated for VAT yet Twiglets and Skips are zero-rated.
Rice cakes are zero-rated if they are sweet but standard if they are savoury!
The message here is that you need to check your receipts to see what VAT has been charged on.
Eat-in or take-away?
Ever wondered why cafés always ask if you are eating your sandwich in or taking out even if they don’t change their service depending on your answer?
It’s nothing to do with china or seating plans.
It’s all to do with VAT.
If you eat your sandwich on the premises (with a plate or not) then this is chargeable at the standard rate.
A cold takeaway sandwich is zero-rated.
Beware of paninis though. The moment they are heated they become standard rated hot food!
VAT on entertaining
Normally VAT on entertainment is not claimable. So, if your executives are in the habit of taking customers out for a meal at The Ritz then you have to make sure you don’t claim this back. However, this is not the case for staff entertainment.
If the company throws a summer party for all staff or treats one particular team member to a meal for good performance then the VAT is claimable.
Christmas party anyone?
Although there is a blanket ban on claiming back the VAT on business entertainment as we noted above, this is not the case for staff.
And this extends to the Christmas party.
But beware, if the party is restricted to just the directors and their partners then you can’t claim this back at all.
You are also likely to have some disgruntled employees!
VAT on mileage claims
Imagine being able to claim back VAT when there’s no evidence that VAT was paid in the first place and the person you are paying isn’t VAT registered.
Sounds crazy right?
But surprisingly this is exactly the case as you can claim back the VAT element of payments made to staff for mileage done in their own car.
Now admittedly you can only claim the VAT on the fuel element of the payment but if you have a lot of staff who regularly use their own cars then you could find yourself being able to reduce your VAT bill by a decent amount.
Keep the receipts
This is fairly simple advice that pretty much everyone understands but what about that annoying time that the car park ticket machine refuses to give you a receipt?
Well, the good news is that you can still claim back VAT on staff expenses under £25 without a receipt.
The bad news is that you still have to prove that the supplier is VAT registered.
Which might not be efficient if you are just wanting to claim the VAT element on a £2.50 charge.
Frankly, we think that it would probably take more time to prove that a car park operator was VAT registered that it’s worth in VAT.
Need a manual?
If you have staff that carry out services that are technical in nature then you would probably be comfortable with the idea of them buying manuals or guide books and then claiming them back on expenses.
And of course, you know that books are zero-rated so there won’t be any VAT to reclaim.
But what about eBooks?
One of the quirks of the UK tax system is that hard copy books are zero-rated but exactly the same title in electronic form is standard rated.
So, if you have people who buy their manuals to use on a laptop or tablet then remember to claim back the VAT.
When is an expense not an expense?
When it’s a disbursement
The problem here is that the VAT treatment is completely different depending upon how you are using the item in question.
Imagine you have agreed with a customer that they will cover any expenses that arise due to a job you are going to do for them.
These are known as expenses for VAT purposes and are chargeable at 20%. Incidentally, this is for all of the expenses and not just the standard rated ones.
Conversely, if you simply agree to pay for something on behalf of the customer and don’t use it in any way then this is a disbursement and you just charge the cost on without adding VAT.
Fancy a beer?
At the end of a long day, what could be better than relaxing with a cold beer?
What happens if you are paying an expense claim for subsistence and your employee has included alcohol on the claim?
Well, the good news is that as long as it is ‘reasonable’ (although HMRC doesn’t say what reasonable is) then you can claim the VAT back.
Of course, the claim needs to be backed up with a receipt, it has to be for employees only and they need to be away from their normal place of work.
VAT on expenses guides
Handy guides for you to download and keep in your back pocket.
The ultimate guide to VAT on expenses
Master the basics of VAT on expenses and be confident in what you can claim for with this guide.
The 7 step guide to getting compliant
Ensuring you get, and stay, VAT compliant with Expenses can seem like a mammoth task. With our step by step guide, you can be confident you're not missing a thing.
The guide for what you could be missing
Whether you're a VAT veteran or a VAT virgin, VAT on expenses can still be a subject that gives accountants sleepless nights. This guide walks you through all of those commonly missed items in one download.
