If you are VAT registered you reclaim the VAT on what you buy for the business. Three things narrow that — some categories are blocked outright, private use must be apportioned, and every claim needs evidence.
The basic rule
You reclaim VAT on goods and services bought for use in your business, in box 4 of your VAT return. Three conditions apply to every claim:
- The purchase must relate to your business purpose — to VAT taxable supplies you make.
- If the item is also used personally, you claim only the business proportion.
- You must hold a valid VAT invoice.
Reclaim VAT on goods or services you have not paid for and you must repay HMRC — that is clawback.
Reclaimable and blocked, side by side
| You can reclaim | You cannot reclaim |
|---|---|
| Stock, materials and consumables | Anything only for personal use |
| Professional fees, software subscriptions, subcontractor invoices | Goods and services used to make VAT-exempt supplies |
| Rent and utilities on business premises | Entertaining or hospitality for people you do business with |
| Vehicle running costs, repairs, off-street parking and accessories fitted for business use — even where VAT on the vehicle is blocked | Goods sold to you under a second-hand margin scheme |
| Employee travel on business trips — transport, meals and accommodation you pay for | Business assets transferred to you as a going concern |
| Pre-registration purchases, within the time limits below | Employee expenses paid at a flat rate rather than reimbursed against receipts |
Two further points. A mixture of taxable and exempt supplies makes you partly exempt, restricting recovery. And some high-value assets fall within the Capital Goods Scheme, which spreads the claim over several years and adjusts it as your use of the asset changes. The scheme covers four defined categories at two different thresholds:
- Computers and computer equipment — £50,000 or more, excluding VAT
- Ships, boats and other vessels, and aircraft — £50,000 or more
- Land, buildings and civil engineering works, including refurbishments — £250,000 or more
- Alterations, extensions and annexes — £250,000 or more
Price alone does not make something a capital item. A £60,000 machine tool sits outside all four categories, so it is an ordinary input tax claim in the period you buy it, not a Capital Goods Scheme asset.
The business entertainment block
You cannot recover input tax on business entertainment. Entertainment means hospitality of any kind — food and drink, hotel accommodation, theatre and concert tickets, sporting events. It counts as business entertainment when all three are true: entertainment is provided, it goes to people who are not employees, and it is provided free.
Employees are not the same as guests. Directors, partners and anyone managing the business count as employees here. Pensioners, former employees and non-employee shareholders do not.
Staff entertainment is recoverable. Entertaining employees to reward good work or improve morale is wholly for business purposes, so VAT on staff parties, team-building and outings is not blocked. Different rules apply where entertainment goes only to directors or partners, and where employees host non-employees the block follows the guests. Where a cost covers both entertainment and non-entertainment purposes, only the entertainment element is blocked.
The overseas customer exception. Entertainment for overseas customers — those not ordinarily resident or carrying on a business in the UK, including the Isle of Man — is not blocked. VAT may be recoverable if it is for business purposes and reasonable in scale and character, but a private benefit to the individual triggers an output tax charge that cancels the recovery out. Many businesses treat the VAT as non-deductible instead.
The car block
As a general rule you cannot recover the VAT on buying a car. You can recover it in full only on an excepted car — one that:
- is stock-in-trade of a motor manufacturer or dealer
- is a qualifying car intended for use primarily as a taxi, driving instruction car or self-drive hire vehicle
- will be used exclusively for business and is not made available for anyone’s private use
“Exclusively for business” is stricter than it sounds — home-to-work travel counts as private use unless it is a temporary workplace, and the restriction must be real and evidenced, commonly in an employment contract.
Leasing is 50% blocked. Lease a qualifying car for business and you normally cannot recover 50% of the VAT; you reclaim the other 50% under the normal rules. Full recovery applies only where the car is used primarily as a taxi, for self-drive hire or for driving instruction. The block also covers lease termination charges and end-of-lease rebate credit notes.
Hire is different from leasing. Hire a car for business use only for no more than 10 days and you reclaim all the VAT. Hire one to replace a company car off the road and you can usually reclaim 50%. Commercial vehicles are outside the block — vans used only for business follow the normal rules.
Fuel and the scale charge
Where a vehicle is used for both business and private journeys, you have three options.
| Option | What it means |
|---|---|
| Reclaim all VAT and pay the fuel scale charge | Simplest. Recover VAT on all fuel and account for a fixed output tax charge set by CO2 emissions |
| Reclaim only business fuel | Requires detailed mileage records for every journey |
| Reclaim nothing | Sensible where business mileage is low enough that the scale charge would exceed the VAT recovered |
The third option is all or nothing. Choose not to reclaim VAT on fuel for one vehicle and you cannot reclaim it on fuel for any vehicle in the business.
Scale charges are VAT-inclusive amounts set by CO2 emissions and by the length of your accounting period. The current table runs from 1 May 2026 to 30 April 2027 — a car emitting 120g/km or less carries £163 for a 3-month period, £54 for a 1-month period and £657 for 12 months. Use the new scales from your first accounting period beginning on or after 1 May 2026. The charge goes in box 1, its net value in box 6.
Fuel used only for business is fully recoverable, with no scale charge.
Mixed use: apportioning
Where something is used for both business and private purposes you claim the business proportion, and must keep records showing how you arrived at it.
HMRC’s examples are usefully blunt. If half your mobile calls are personal, reclaim 50% of the VAT on the handset and service plan. If your home office takes 20% of your floor space, reclaim 20% of the VAT on utility bills. A round percentage with nothing behind it is the weak point in most home-office claims.
VAT on purchases made before you registered
You can reclaim VAT on things bought before registration, within two limits:
- 4 years for goods you still hold, or goods used to make other goods you still hold
- 6 months for services
The purchases must relate to the business now registered and to the taxable supplies you make. Claim it on your first VAT return.
In practice: stock, equipment and computers bought up to four years ago and still in use are claimable. Accountancy fees, web development and advertising older than six months are not.
The evidence you need
You cannot claim input VAT without a proper VAT invoice. That is where compliance checks begin.
- Supplies of £250 or less including VAT can be covered by a simplified invoice showing the supplier’s name, address and VAT number, the tax point, a description of what was supplied, and for each rate the total payable including VAT and the rate charged.
- Above £250 you need a full or modified VAT invoice if you ask for one.
- Import VAT needs the relevant certificate. A C79 must be kept in its original form.
- Every VAT-registered business must keep a VAT account — the audit trail between your records and your return. There is no set format.
- Keep business records for at least 6 years.
Frequently asked questions
Can I reclaim VAT on client entertaining?
No. Input tax on business entertainment is blocked. The exception is entertainment for overseas customers — people not ordinarily resident or carrying on a business in the UK — where VAT may be recoverable if it is reasonable in scale and character, though a private benefit triggers an output tax charge that cancels it out.
Can I reclaim VAT on a staff Christmas party?
Yes. Entertaining employees to reward them or improve morale is a business purpose, so VAT on staff parties, team-building and outings is not blocked. Different rules apply where entertainment goes only to directors or partners.
Can I reclaim VAT on a company car?
Usually not. VAT on buying a car is blocked unless it is stock-in-trade, is a qualifying car used primarily as a taxi, for driving instruction or self-drive hire, or is used exclusively for business and not available for private use. On leasing a qualifying car, 50% is blocked.
How far back can I reclaim VAT on purchases made before I registered?
Four years for goods you still hold or that were used to make goods you still hold, and six months for services. They must relate to the taxable supplies you now make, and you claim on your first VAT return.
Claiming what you are entitled to
Most businesses lose money in both directions — missing legitimate claims on pre-registration purchases and vehicle costs, and over-claiming on entertaining and cars. Neither shows up until someone looks.
SmartFiling files MTD VAT returns on a fixed fee, working directly in Xero, QuickBooks or FreeAgent, with every return reviewed and signed off by an ICAEW Chartered Accountant before submission.
