VIT13400 - VAT Input Tax basics: when input tax can be claimed by the business on supplies to employees
You must take care in applying the supply rule when the third party is an employee. Here are some examples of supplies made to the employer, provided the employer meets the full cost, even when it may look as if the employee has received the supply:
- road fuel and other motoring expenses;
- subsistence costs such as meals and accommodation necessarily paid for whilst away from the normal workplace;
- removal expenses arising from company relocations or transfer of staff;
- sundry items such as small tools or materials purchased on site.
This list is not exhaustive.
You should decide whether the supply is legitimately paid for by the employer for the purpose of the business. If it clearly is then input tax should be recovered. This is in keeping with the intention of the legislation.
Organisations may have a substantial part of their workforce self-employed, although in all other respects they perform the role of employees. Tribunals tend to treat subsistence type expenditure incurred by self employed labourers or contractors as being payment for supplies made to their “employer”. You should refer to the case of Stormseal (UPVC) Window Co Ltd at VIT61330.
A business might pay for subsistence, road fuel or other motoring costs incurred by self-employed people working for it. If it does the tax incurred is input tax of the business provided:
- the individual is engaged on the same basis as an employee; in other words they are paid on a fixed rate basis, being unassociated with the trading profits of the business;
- the individual incurs the expenditure only in respect of their “employment” by the business. Where someone like a self employed salesman represents a number of firms at the same time, their subsistence does not relate to any one “employer” and none of those firms can treat the VAT incurred as input tax;
- the individuals receive no payment from the end customer;
- the business pays them back at cost, including VAT, dealing with the expense in the normal business accounts.
These guidelines also apply to actors, extras and other casual workers engaged in film, TV or similar productions.
Where the individual is registered for VAT in their own capacity the tax should normally be treated as incurred by the individual for the purpose of their business. HMRC may exceptionally allow recovery by the “employer” only if we are satisfied that the individual has not recovered tax under their own registration.
Sometimes an “employer” will incur subsistence type expenditure for a number of “employees” at the same time. For example, a film company on location may block book a hotel. In such circumstances there will be a single tax invoice from hotel to “employer”. The “employer” can claim input tax on the expenditure even if some of the individuals are VAT registered.