25 May Can you reclaim VAT on a work of art for your office?
You’ve just bought a work of art for the reception area of your offices. It was quite pricey and included a charge for VAT. As the item doesn’t play a direct role in your business are you entitled to reclaim the VAT?
VAT on purchases
Most purchases made by your business will have a clear link to the supplies you make to customers. It might be raw materials for manufacturing, stationery to print your invoices or even the desk that the MD sits at. They each have a function for the business and so HMRC is happy for you to reclaim any VAT charged. However, the position is less clear where the item purchased doesn’t seem to have a clear business motive.
Is it a business benefit or purpose?
When it comes to VAT the question of business purpose is an important one. VAT can only be reclaimed where there is wholly or partly a business purpose. The fact that a purchase may benefit your business is irrelevant.
Example. The MD of a firm pays substantial fees for membership of a prestigious health club. He claims that he’s made many business contacts through the club which has brought in a lot of work for the firm. HMRC probably wouldn’t argue, but it would still disallow a claim for the VAT paid on membership based on those facts alone. It would say that the purpose of the expense is a personal one and that the business benefit was just an advantageous side effect.
A fine line
So where does that leave you if you’ve bought a work of art to display in the firm’s reception area? It’s a tricky question. You might have bought the art because you liked it – which is solely a personal reason, but at the same time you thought it would enhance the business’s image to have it in the reception area for visitors to see (and staff to appreciate) – which is a business purpose.
What does the law say?
VAT legislation isn’t very helpful in determining whether or not VAT can be reclaimed. But there have been some decisions made by the courts which provide better guidance. Ultimately the courts tried to find the motive, i.e. what was in the buyer’s mind at the time of purchase.
There are two important cases that went the taxpayer’s way; Ian Flockton Developments ltd v Customs and Excise 1987 and more recently the First-tier Tribunal case of Folkestone Harbour (GP) Ltd v HMRC 2015 . These were about VAT paid on a racehorse and a decorative fountain respectively.
A good or bad business idea?
Importantly the judges in both cases weren’t concerned whether or not the purchases actually benefited the businesses, or whether they were a wise or proper use of business money. They were mainly concerned that there was evidence to show that the motive was a business one.
Tip. If you’re considering buying or leasing a work of art etc. that doesn’t have an obvious business purpose, keep thorough minutes of board meetings etc. in which you discuss the business motives behind the decision. Should HMRC question why you reclaimed the VAT, show it the notes from the meetings and direct them to the decisions in the Flockton and Folkestone Harbour cases.
If your motive for making the purchase was related to your business you can reclaim the VAT. You don’t have to prove the purchase benefited your business, only that you had a genuine business reason. To support your claim keep records of board meetings etc. in which you discuss the motive for the purchase.