Calculating VAT on Common Business Expenses
Value Added Tax (VAT) extends beyond just sales of goods and services. As a business owner, you must also consider the VAT implications of your business expenses. Certain expenditures incur VAT charges while others don’t. Calculating VAT correctly on expenses is key for proper tax compliance and avoiding unnecessary costs. This guide provides simple examples of how VAT applies to common business expenses.
VAT Basics
VAT is charged on most goods and services sold in the UK. The standard rate is currently 20%, with a reduced 5% rate applying to some essentials. Certain services are VAT exempt including insurance and education.
Businesses act as VAT collectors, adding it on sales and remitting VAT collected to HMRC after deducting VAT paid on business purchases. This results in paying VAT on the ‘value added’ at each stage of production and distribution.
VAT on Operating Expenses
Many common operating expenses incurred by businesses are liable for VAT at 20%. This includes:
Office Supplies
Purchases of typical office supplies for your business are VAT taxable at the standard rate of 20%. For example:
- Pens – A box of 50 pens costs £20 excluding VAT
- VAT rate – Standard 20%
- VAT amount – £20 x 20% = £4
- Total payable – £20 + £4 VAT = £24
Office supplies are considered vatable business expenses. The VAT must be tracked and can be reclaimed on your VAT return.
Software Subscriptions
Ongoing software subscriptions and licenses used by your business are also subject to 20% VAT:
- Annual CRM license – £5,000 per year excluding VAT
- VAT rate – Standard 20%
- VAT amount – £5,000 x 20% = £1,000
- Total payable – £5,000 + £1,000 VAT = £6,000
Utilities
Your business utility bills including electricity, gas, water, phone and internet incur VAT at 20%:
- Monthly electricity – £250 per month excluding VAT
- VAT amount – £250 x 20% = £50
- Total monthly cost – £250 + £50 VAT = £300
Track utilities carefully to deduct VAT amounts from your overall liabilities.
VAT on Capital Expenditures
Purchases of significant business assets and equipment also attract VAT:
Office Furniture
Office furniture from desks to filing cabinets has standard-rated VAT at 20%:
- 5 desk chairs – £500 total excluding VAT
- VAT amount – £500 x 20% = £100
- Total payable – £500 + £100 VAT= £600
IT Equipment
Computer hardware and accessories incur 20% VAT as illustrated below:
- 10 laptops – £20,000 total excluding VAT
- VAT rate – Standard 20%
- VAT amount – £20,000 x 20% = £4,000
- Total payable – £20,000 + £4,000 VAT = £24,000
Company Vehicles
Cars and commercial vehicles purchased for business use are also liable for VAT:
- Van price – £18,000 excluding VAT
- VAT amount – £18,000 x 20% = £3,600
- Total payable – £18,000 + £3,600 VAT = £21,600
VAT on Business Services
Many services used by companies incur VAT including:
Accounting
Accounting and bookkeeping services by providers attract 20% VAT:
- Monthly fees – £500 per month excluding VAT
- VAT amount – £500 x 20% = £100
- Total monthly cost – £500 + £100 VAT = £600
Legal Services
Legal fees for business services like contracts have standard-rated VAT at 20%:
- Legal work – £5,000 of billable hours excluding VAT
- VAT amount – £5,000 x 20% = £1,000
- Total payable – £5,000 + £1,000 VAT = £6,000
Marketing Agency Services
Marketing and advertising services provided to your business are liable for 20% VAT:
- Campaign fees – £10,000 excluding VAT
- VAT amount – £10,000 x 20% = £2,000
- Total bill – £10,000 + £2,000 VAT = £12,000
VAT on Employee Expenses
Some employee-related expenses are VATable:
Training Courses
External training for employees attracts 20% VAT:
- Course fees – £1,500 per employee excluding VAT
- VAT amount – £1,500 x 20% = £300
- Total payable – £1,500 + £300 VAT = £1,800
However, the reimbursement of employee expenses is outside the scope of VAT.
Company Events
Company team events like conferences and off-sites incur VAT on the venue and catering costs:
- Event venue – £3,000 excluding VAT
- Catering – £1,500 excluding VAT
- Total costs – £3,000 + £1,500 = £4,500
- VAT at 20% – £4,500 x 20% = £900
- Total payable – £4,500 + £900 VAT = £5,400
Proper VAT treatment of all business expenses, from office supplies through to asset purchases and contracted services, is vital for accurate tax accounting. Follow these examples when calculating VAT on your own company’s expenditures.
