The effort involved in expensing and reclaiming VAT is onerous for the small business owner, but technology is there to ease the burden, reports Matt Lewis
This article was first published in the June 2015 UK edition of Accounting and Business magazine.
As if small business owners didn’t have enough on their plates, some 60% of them (according to the Association of Accounting Technicians) are also responsible for their company’s finances. This includes submitting complicated VAT returns in accordance with rules that can sometimes appear nonsensical.
Even for companies that do have a specialist finance leader, 75% say they wish they knew more about expenses and reclaiming VAT, with 43% concerned about tax inspections and a quarter not confident about international VAT, according to research commissioned by Concur.
As one of the government’s largest earners, VAT is not going away. In fact, if anything, HMRC is becoming more stringent, given the recent spotlight on company and individual abuse of the system.
Over 80% of VAT incurred on expenses is recoverable, and travel and entertainment expenses are the second largest controllable expense for most companies, accounting for around 12% of operating costs. But most small businesses have too little information and typically under-claim, with 13% of finance leaders saying they don’t claim VAT on expenses at all, according to Concur.
However, increasingly automated systems for both HRMC submission processes and internal expenses management solutions should make VAT easier to cope with. Fundamental to getting the process right is to first understand what is expected by HMRC and, second, to have in place a policy that clearly defines what can and cannot be reimbursed, with processes that are easy for employees to understand and adhere to.
HMRC wants to see such a policy in force, which would lay out specifics such as business travel guidelines, personal expenditure rules detailing the circumstances and amounts that are reimbursable, including what is specifically excluded, and mileage and fuel rates for reimbursement.
For example, VAT can be claimed back on the fuel element of individual mileage allowances but must be supported by appropriately dated fuel VAT receipts valued at more than the amount of the VAT being reclaimed. And VAT can only be claimed back on gifts under the value of £50, and only if the total spend on gifts for that same person comes in under £50 for the whole year.
Tax inspectors also look for an appropriately senior level of sign-off for staff expenses, with robust documentation and verification, and further checks performed by a finance team or outsourced to a third party for audit. Finally, they want to see a secure payment system that is not vulnerable to abuse, say, from employees dipping into the funds.
Devil in the detail
If the specifics seem complicated, it’s because they are. Rules such as VAT being claimable on off-street parking but not on-street parking, and purchases over £250 needing a full VAT receipt on top of a till receipt, make it vital for someone in the company to keep up to date with changing rules, or to enlist external help, particularly for changing European legislation for international VAT.
Lost receipts and ‘guesstimating’ monthly travel, rather than recording journeys and expenses as they happen, prevent many companies from correctly claiming back the VAT they’re due. And, worryingly, just 1.2% of out-of-policy submissions are rejected by managers, mainly because they haven’t understood the rules.
Employees can only do things properly if it’s made easy for them, and this is where web-based and mobile solutions come into their own. Photographing receipts straight onto a smartphone and entering expenses into a mobile app on the move saves the average employee over four hours a month, cuts down on repetitive tasks and reduces the waiting time to be reimbursed. Automated solutions also save the admin team time wasted in chasing receipts and inputting basic information. And because all expenses data is consolidated in one place, it also provides valuable insight into spending trends and where savings can be made. Finally, and perhaps most importantly, it prepares the information correctly for submission to HMRC.
Understanding VAT is all about efficient processes, good practice – such as running spot-checks to ensure the company remains compliant – and, above all, knowing when and where to find the right information.
Matt Lewis is EMEA compliance director at Concur
"Lost receipts and ‘guesstimating’ monthly travel prevent many companies from correctly claiming back the VAT they’re due"