The Three Types of Recoverable VAT - A Guide

It may sound straightforward, but when you get into the nitty gritty, the rules and terms regarding recoverable VAT can be mind-boggling - and that can even be the case for experienced professionals.

Here's a very general quick guide to the three types of VAT recovery you can expect to encounter when claiming back your VAT - and what constitutes recoverable VAT, non-recoverable VAT and part-recoverable VAT.

What is Fully Recoverable VAT?

You can claim VAT back when you are claiming a purchase or your expenses for use only in 'commercial' circumstances and purposes- i.e. for business use.

The definition of what constitutes a 'commercial activity' is rather wide, including commercial contracts, certain categories relating to subcontracting, consulting for commercial purposes (and purposes related to the commercial business), testing and analysis for commercial purposes and most other activities where VAT is charged to a commercial client.

An important note here - this is a UK-specific example. For EU or overseas VAT claims, this information is likely to be different.

What is Non-Recoverable VAT?

Just as with the example above, non-recoverable VAT is the opposite: when your purchase or expenses are related to 'non-commercial' activities, no VAT is eligible to be reclaimed. Examples of this could include business conducted which is partially or wholly unrelated to clients, state-sponsored or government-funded business (although this again is subject to a myriad of terms and conditions, and is best worth checking), and any non-official business.

Partly-Recoverable VAT

This category is more flexible than the other two, in that it consists of purchases and expenses which don't fall into one category completely, and can be used for either commercial or non-commercial purposes. As a result, the VAT paid on an item or service is partly recoverable.

This may sound a little confusing, but in practice, this is possibly the most likely category in which you'll find VAT recovery claims. Generally, the expenses and purchases which fall into this category are those which you could potentially use for both commercial and non-commercial purposes, such as laptops, mobile phones, and other pieces of equipment.

For example: if you were to purchase a laptop for your business, then take it home with you, and use it to send some non work-related emails, that would be an example of a purchase used for both commercial and non-commercial purposes. As such, any purchases made for general overhead expenditure - such as a batch of new computers for the office, or other types of equipment, would similarly fall under the part-recoverable VAT category, as (similar to the example above), it can be used for both purposes.

Determining Your Expenses' Recoverable VAT Category

Ultimately the easiest solution to determine which categories your purchases and expenses fall into is to outsource all VAT-related tasks (including recoverable VAT) to reliable automated software. Otherwise, asking yourself a few questions about the cause, use and purpose of the purchase and/or expense, could go some ways towards helping you understand which category you can use to claim your VAT back.