Allowable Input Tax: What VAT Can Your Business Legally Reclaim?

For UK VAT-registered businesses, input tax recovery is the largest cash-effective lever after registration itself. The rules are not complicated but the boundaries are tight: business entertaining is blocked entirely; staff parties recoverable up to £150 per head; company cars 50% blocked on leasing and 100% blocked on private fuel; commercial vehicles fully recoverable; bad debt relief available at 6 months overdue; mobile phones with proper apportionment; and HMRC discretion to allow recovery without a valid invoice in narrow circumstances. Errors here are common and cost £1,000-£10,000+ per year for typical SMEs.

Business entertaining vs staff parties

• Client entertaining (lunches, dinners, hospitality for customers/prospects): input VAT BLOCKED. Cannot recover.
• Staff entertaining (Christmas party, summer outing, team meals for employees only): input VAT recoverable up to £150 per head per year.
• Mixed entertaining (clients + staff at same event): apportion strictly. Input VAT on staff portion recoverable; client portion blocked.
• Subsistence on genuine business travel (hotel, food while away from base): input VAT recoverable as travel expense.
• Staff Christmas hampers/gifts above £50/head: input VAT recoverable but BiK applies to the recipient.

Employee travel, mileage and subsistence

For VAT recovery on employee travel:

1. 1Train, bus, taxi fares for business travel: VAT-inclusive amount can be reclaimed (where the supplier is VAT-registered and provides a VAT receipt).
2. 2Hotel accommodation on business trips: full recovery on standard hotel bill.
3. 3Mileage at simplified 45p/25p rate: input VAT calculated on the fuel element using HMRC advisory fuel rates. For petrol: typically £0.04-£0.06 of VAT per business mile.
4. 4Public transport season tickets used for commuting: NOT recoverable (commuting to normal place of work is private).
5. 5Meals away from base: recoverable. Meals at normal workplace: not recoverable.

Company cars: the 50% leasing block

• Company car LEASE payments: input VAT 50% recoverable (HMRC convention reflecting typical private use).
• Company car PURCHASE: input VAT 100% blocked (cars used for private and business use).
• Repairs, servicing, accessories: input VAT recoverable on business-use proportion (typically 100% if business use is 51%+).
• Private fuel for company cars: input VAT recovery requires the Fuel Scale Charge (output tax based on CO2 emissions) — most businesses opt out of recovery to avoid the scale charge.
• Salary sacrifice EV: 100% recovery for fully electric cars at the time of writing, subject to ongoing rule changes.

Commercial vehicles

Vans, pickups and other genuine commercial vehicles:

• Purchase: 100% input VAT recovery (where business use 51%+).
• Lease: 100% input VAT recovery (no 50% block for genuine commercial vehicles).
• Fuel: 100% recovery on business mileage; private mileage via fuel scale charge or driver reimbursement.
• Repairs and maintenance: 100% recovery.
• Insurance: 100% recovery (insurance is exempt anyway — no VAT to reclaim).
• Distinction matters: pickup vehicles can be commercial OR private depending on payload and seating; HMRC has specific rules.

Bad debt relief: the 6-month rule

Where a customer fails to pay an invoice on which output VAT was charged:

1. 1Bad debt relief available where invoice has been outstanding for at least 6 months.
2. 2Customer must not have been paid in any form.
3. 3Bad debt must be written off in the supplier's records.
4. 4Recovery: input VAT entry on the next VAT return reverses the original output VAT.
5. 5If the customer subsequently pays: output VAT must be re-paid in the period of receipt.
6. 6Time limit: claim within 4 years and 6 months of invoice date.

Mobile phones and tech: mixed-use

For mobile phones, laptops, tablets used for both business and personal:

• Business-only phones (no personal use): 100% recovery.
• Mixed-use phones: business-use proportion recoverable.
• Where mixed use is unclear or hard to evidence: HMRC accepts a reasonable apportionment based on usage patterns.
• Employee-issued phones: 100% recovery if the phone is for business purposes; private use becomes a BiK rather than a VAT recovery issue.
• Sole-trader-owned phones: apportionment by use percentage.

Reclaiming VAT without a valid tax invoice

HMRC has discretion to allow VAT recovery without a valid invoice where:

• The supply genuinely occurred and was for business purposes.
• The supplier is genuinely VAT-registered (verifiable via HMRC).
• The taxpayer has alternative evidence (bank statement, contract, supplier confirmation).
• The amount is reasonable and proportionate.
• No fraud or abuse pattern.
• Discretion is exercised case by case; HMRC is unlikely to allow if invoices are routinely missing.