Recovering VAT on Business Travel and Accommodation Costs

Regardless of what size a business is, it will almost certainly incur expenses when staff travel about. For longer distance, or travel over lengthier times, it may also be necessary to secure accommodation away from an employee’s normal home. Recovering VAT in these circumstances will help minimise the cost to the business.

The following guide discusses the recovery of VAT when a business owner or direct employee is travelling. If a business pays for travel or accommodation costs on behalf of someone else – for example a customer, supplier, business associate or an employee’s family – then the rules are not straightforward and an element of judgement may be required.

Basic housekeeping rules for recovering VAT

As ever with VAT the core housekeeping rules apply. In order to reclaim VAT incurred, a business has to have sufficient appropriate evidence of the VAT it has paid out. Generally speaking, this means a VAT Invoice.

When staff are out travelling, they need to be ‘reminded’ to obtain proper invoices for all costs. The receipt from a credit card terminal proves payment, but doesn’t detail VAT so can’t be used to evidence a VAT reclaim.

Many larger businesses have a policy that they won’t re-imburse staff for expenses if they don’t have a VAT Receipt. This sounds harsh, but depending on the situation it can be a necessary motivation to ensure everyone follows the rules.

Recovering VAT from business travel

From a VAT perspective, travel is generally ‘safer’ than accommodation. This is because the VAT charge on most forms of travel is zero. The zero rate of VAT applies to scheduled bus, train, air and ferry services. Few taxi drivers are registered for VAT and, again, there is no VAT to recover. Most travel costs should be entered into bookkeeping systems as “Zero Rated”; as no VAT has been charged, there is nothing to recover.

The exception to the Zero Rate rule

The most common exception to the Zero Rate rule is car hire. This includes not just self-drive but also chauffeur/airport transfer firms (as opposed to taxis) who often are VAT Registered and charge VAT on their fee. Generally, they are used to dealing with corporate accounts and will provide a VAT invoice on request.

Reimbursing VAT for use of a private car

The other exception is reimbursing staff for use of their private car. It is not wise to simply pay for an employee’s fuel. Doing this makes it highly likely that a personal benefit has been provided to the employee, and this brings both VAT and personal income tax consequences.

The HMRC approved method is to pay the employee according to an approved rate per mile travelled. At time of writing, this is 45p per mile for most vehicles.

If the employee has a VAT receipt for fuel, obtained at a time similar to the journey being claimed, it is permissible for the business to claim VAT on the ‘fuel only’ part of the mileage rate. At time of writing, the ‘fuel only’ mileage rate is between 12p and 27p per mile, depending on fuel type and engine size. Taking a 2-litre diesel car as an example, the fuel only rate is 13p per mile meaning a business can recover 2p per mile of VAT.

Many businesses choose to pay the 45p per mile, but leave the 2p of VAT as it’s not worth the administrative bother of calculating.

Recovering VAT on accommodation for business travel

If an employee has to stay overnight while on business, any VAT on hotel costs should be recoverable. The main issue is ensuring a VAT invoice is made out, ideally, to the business or failing that to the employee who’s staying over.

It is worth noting that if the accommodation is B&B, Airbnb or a short-term holiday let, then it is less likely that the provider is VAT Registered or that VAT has been charged. In these cases, there is no VAT to recover, and the cost should be recorded on bookkeeping as ‘Zero Rated’.

The other planning point to highlight here is a pitfall that exists when travel agents and booking websites are used. Their sales are often subject to the Tour Operator Margin Scheme – which means there is no distinct VAT charge on their bill and hence nothing to recover. From a VAT perspective, the best course of action is to book directly with a hotel as this ensures their VAT invoice comes straight to you.

Recovering VAT on overseas business travel and accommodation

If your business entails staff travelling outside the UK then any VAT charged on, for example, hotel costs is not UK VAT and cannot be included in your business’ UK VAT Return.

It is still worthwhile obtaining VAT Invoices to evidence how much VAT has been spent. Depending on the values in question, it can be worthwhile making a claim to recover VAT from the relevant country’s tax authority. For example, if you had staff staying in Berlin for a period of time to attend a project onsite with a client, it might be worth gathering the accommodation invoices (and any other subsistence costs) and making a claim to the German authorities at the end of the year. Speak to your accountant if you are considering this process.

Covering costs for non-staff and non-business purpose

If the business pays travel or accommodation expenses on behalf of anyone who is not a payrolled employee then it is likely that VAT should not be recovered. These costs would be classified as ‘entertaining’, or, if they are paid on behalf of a contractor doing work for you then the accommodation has not been provided to your company, but to that contractor. Either way, VAT should not be recovered. When paying travel costs (meaning when buying a ticket directly from an airline, on behalf of a third party) VAT is not normally an issue as most travel is subject to a ‘Zero Rate’ VAT charge. When paying accommodation costs, care should be taken to ensure accurate calculations where required.

Similarly, if travel or accommodation are provided for an employee for ‘non-business’ purposes – for example a personal holiday is paid for by the employer – then the rules are complicated. Given this, and the interaction with the employee’s personal tax position, it is likely that specific advice should be taken.

Got another VAT question?

As ever with any business expense or VAT queries, it is often best to speak to a professional. Give our Associate Director, Iain Harris a call if you have any VAT questions. Call him on 0131 364 4191 or email iain.harris@ae-ca.co.uk

Please note the above commentary is a general guide only, and should not form the basis of specific decision-making