What is Purchase Tax or VAT on your Purchases?
Any Purchase tax that appears on your Bills, Expenses, and any Purchase Orders raised.
When you purchase any goods or services from a supplier, it is presumed that in most cases, you are likely to be charged VAT, as the invoice you receive will be subject to VAT.
This is when you decide whether the purchase tax shown on the invoice is recoverable or not.
When Purchase VAT is charged on an invoice, the possibility of the VAT portion being reclaimed back from HMRC depends on what the actual purchase was for.
In most situations, the VAT on purchases is deemed as fully recoverable when the purpose of the service or goods provided was solely for commercial/business reasons.
When your VAT is deemed fully recoverable, this VAT can then be held in a suspense account, ready to be reclaimed back from HMRC, during the process of filing your VAT return (box 4).
If the VAT on your purchases or expenses is only partially recoverable, then the VAT is charged in full, and subsequently, the recoverable amount can be reclaimed at a later date.
Example: An accountancy practice firm
Recoverable amount 60% for purchases and expenses on the provision of accountancy servicesNon-Recoverable amount 40% for purchases and expenses on the provision of training activities, including books and course materials (outside the scope of the main commercial business activities).
Reclaiming VAT on your Purchases
Purchases prior to VAT registration
There is an expiry date for backdating and reclaiming your VAT on purchases. Please refer to the HMRC website here regarding this.
These reclaimable amounts should be reclaimed by including the figure in your VAT Return and disclosing this value within box 4.
Please note that to reclaim VAT on your Purchases or Expenses, you will need to have received a Purchase VAT Invoice or a VAT Receipt.
For a successful VAT reclaim, you need to ensure the necessary details are displayed on the VAT Purchase Invoice or VAT Receipt, for the forms to be valid. These details are as follows:
- Suppliers Name
- Suppliers VAT Registration Number
- Suppliers Registered Address
- VAT amount charged on the Purchase/Expense (even if this figure is zero)
Types of VAT on your Purchases
- Purchases from outside EU
- Purchases from non EU countries
Commonly, VAT on purchases is not charged when the supplier is located overseas, yet there are some exceptions to this rule. For further guidance on this, please refer to HMRC.
Set up VAT on Purchases
Please note that only VAT registered companies are allowed to issue invoices inclusive of VAT
If your VAT has yet to be set up, you will need to do this first.
- Go to Taxes, select VAT, then follow the on-screen wizard. This shouldn't take more than a minute.
Set up VAT on Purchases:
- Go to Taxes, then select VAT.
- Select the Edit VAT ▼ drop-down arrow, then select Edit rates.
- If VAT for Purchases has not already been added, select Add tax rate.
- Select the Purchases checkbox.
- Give the new tax rate a name, description, and percentage rate (usually the standard), then choose an account and determine which return line you want the tax amount to appear on.
Record your Purchase VAT
Similar to VAT on sales, you will also need to record any VAT on purchases.
- Go to Taxes, then select VAT.
- Select the Prepare return and check the necessary details.
- Any adjustments that need to be made for purchase VAT reclaims and on sales VAT and outputs can be made at this point by selecting Adjust.
- To complete, select Mark as filed or Export or File online with HMRC.