All You Need to Know About VAT on Subsistence

What is subsistence?

Subsistence refers to food, drink, and accommodation expenses incurred by employees while working away from their usual place of business. These costs are typically reimbursed by employers when the travel is necessary for work purposes.

According to HMRC’s internal VAT Input Tax Manual (VIT42500), subsistence expenses may qualify for VAT recovery if they are directly related to business travel and supported by valid VAT invoices. This includes meals purchased during overnight stays or extended travel. 

Subsistence vs. Staff Entertainment

• Subsistence: When an employee is working away from their main office and requires meals (e.g., staying overnight in a hotel and having lunch and dinner paid by the company).
• Staff Entertainment: When food is provided at the employee's regular workplace, such as during a function or regular meals.

Yes, you can claim VAT on subsistence as long as the food and drink expenses meet the necessary criteria. Subsistence VAT is reclaimable when an employee is away from their usual base and the expenses are directly related to their work.

How Much Can You Reclaim?

For VAT purposes, the subsistence payment must be reasonable. HMRC provides some guidance, though there aren’t specific VAT amounts:

• 5 hours away: Up to £5 for food and drink.
• 10 hours away: Up to £10.
• 15 hours or more away: Up to £25.

HMRC Food Allowance and Subsistence

The figures above are the general benchmark rates for subsistence but employers can agree on bespoke amounts with HMRC. There are also nationally agreed scales for certain occupations such as the Road Haulage Association that can be used.

HMRC food allowance is designed to provide guidelines for reasonable subsistence payments. It’s crucial that the amount paid aligns with HMRC’s subsistence guidelines to ensure proper VAT reclaim.

Managing VAT on your expenses doesn’t have to be a trial. If you have clear and well-thought-out systems and you regularly review your compliance then you will be ahead of the game.

Simple things like great recordkeeping and making sure you evidence your decision-making process mean that you are less likely to suffer any penalties. And, of course, leveraging technology to do most of the legwork for you is a massive time saver.

Tip #1 - Use technology to take the strain

Using a well set up and configured system, like Access Financials, to effectively manage your expenses is the smartest move you can make.

With the right configuration in place, you can save time in so many areas, including:

• Data entry
• VAT classification
• Reporting
• Payment

If you are using a manual system then think about making the switch, you’ll be delighted with how efficient your expense process becomes.

Tip #2 – Make sure your coding is correct

You’ll need to make sure that you are coding to a standard and reduced rate naturally. Additionally, you should also make sure you understand the difference between zero-rated and exempt. It’s always a good idea to have ‘not registered for VAT’ and ‘overseas’ codes too.

When completing your VAT return, it's important to consider these categories — especially if you need to apply reverse charge VAT to overseas costs.

Tip #3 – Make sure your bookkeeping is up to scratch

Clear, accurate, and timely record keeping is a fundamental must when managing VAT on expenses.

There are often so many different payments being made and receipts and invoices flying around that it is easy to allow things to get out of hand.

The bedrock of well-managed expenses and VAT system is great record keeping.

Tip #4 - Save your evidence

Although HMRC says that you don’t need to keep receipts for PAYE purposes, you still need to show that you are operating the rules correctly. Our advice is to make sure you have documentary evidence to show why you applied the rules as you did.

The best expenses systems will allow you to save an image of a receipt so you don’t need to have bulky and inefficient filing systems as you can do it all in the cloud.

Tip #5 – Make sure you have a clear and well thought out policy

This is vital for every well-run company.

Having an expenses policy is a must as it will let employees know what they can and can’t claim. It will also detail limits for things such as hotel rooms and subsistence.

Make sure though that it is in clear and easy-to-read language. Steer away from using any jargon that you may have gleaned from the HMRC website. Try to include real-life examples to illustrate your points.

And of course, you must make sure that your policy doesn’t conflict with any VAT or PAYE rules around payments to employees.

Tip #6 – Make sure that you effectively communicate your policies

If you want staff to comply with the policy then they need to know about it!

Making sure you effectively communicate your policy, perhaps in their induction programme and then by issuing updates when things change helps enormously with compliance.

Keep the policy in an easy-to-find place, too, such as a SharePoint location or a main drive folder so that people can refer to it easily and quickly.

Tip #7 – Have a regular review process

Once you have all of your policies and procedures in place then it is easy to breathe a huge sigh of relief and think that your work is done.

But unfortunately, VAT law is constantly changing and you need to make sure you keep abreast of the latest rules.

Read the VAT notices issued by HMRC (you should automatically get them as a VAT-registered business) and amend your systems and processes accordingly.

It’s not enough to hope that you catch things through the updates though. Make sure you also schedule a VAT compliance review every 12 months. Better safe than sorry!

Tip #8 – Document your thought process

One of the features of the VAT penalty system is that the value of the penalty is larger if you have been careless or dishonest.

If you made a mistake in handling VAT on expenses, you might still avoid a penalty by demonstrating that you made a reasonable decision, even if the outcome was incorrect. It's similar to showing your work to explain your reasoning.

Keep a record of your decisions, and the reasoning behind them, and add links to HMRC documentation that backs up your thought process. This will prove that you were taking care and trying to do the right thing.

Tip #9 – Don’t forget to add VAT to expenses that you recharge

This is an area that often trips people up. Very simply, you charge VAT to your customers on expenses that you are recharging where you incurred them as part of providing a service to them.

Disbursements, where you make a payment on behalf of a client, do not attract VAT and this is where the confusion arises.

As an example, if you pay for some market research on your client’s product and pass that on to them then this is a disbursement. If you read the report and use it to make suggestions to help your client market their product then this is an expense and is VATable.

And if it is an expense then it is VATable, even if you didn’t pay VAT on it in the first place as it now forms part of your service rather than being the original thing that you paid for.

Tip #10 – If you are not sure then ask for help

Although it can be difficult sometimes to get through to HMRC, it is always worth persisting to get an answer to something you are not sure about.

Often when you are too close to a problem, it can be difficult to see the wood for the trees, and talking it through with someone does help.

If you do get advice from the VAT helpline, then we’d always suggest that you document the call by noting who you spoke to, what department they are in, and when you called. You'll find this useful in case there is any query later on.

Managing expenses can be a real nightmare, especially if you are using a manual method.

If your employees handwrite a manual expenses sheet, pin their receipts to it and then send it in to be processed then you could well be missing a trick.

Even more importantly, a great system will help you to manage the VAT aspect of expenses so that you don’t need to worry that you are breaking the rules.

In this post, we’ll look at features of modern VAT management systems that can help you manage your VAT on staff expenses.

Managing VAT codes

It goes without saying that, if you're a VAT-registered business, you'll need to submit your VAT return to HMRC.

To do this, you'll need a financial management software that supports VAT submissions, is compatible with the VAT Flat Rate Scheme, and is MTD compliant in order to submit VAT returns online.

The most obvious area that a system can help with VAT is to assign particular types of expense to the right VAT code.

If you have your system set up correctly then train travel will automatically be zero-rated, for example. No need to ever think about it.

This saves time but also means that employees in the field, who nobody expects to be VAT experts, can just enter their expenses and forget about VAT.

Reporting

Have you tried reporting on VAT from paper sheets?

It’s nigh on impossible to produce good quality reports, that you are confident are accurate and in a reasonable amount of time.

You may, of course, think that good reporting on expenses is just a ‘nice to have’, something for the future when you get to it. But you need to be able to show your workings for your VAT return now and reporting is a key aspect of this.

If you manually add in expenses then the report will save you time and if you are able, then having auto-posting set up to send data straight to your nominal ledger is an absolute god-send.

Of course with the push to Making Tax Digital, HMRC is wanting employers to minimise or eliminate any manual interventions on VAT so a great system helps enormously with this.

Calculation

When an employee sends in a paper claim do they work out the VAT on each transaction?

Sometimes these are helpfully shown on receipts but this isn’t always the case. If your staff are having to manually work out the VAT and then you your finance team check their calculation then we’d respectfully suggest it’s time for a change.

A great system works out the VAT automatically, no need for your employee to work it out and no need to check either.

Record keeping

One of the main rules around VAT (and PAYE) is that you keep records and for VAT purposes you need to keep these for at least 6 years.

If you have a filing cabinet and archive room full of expenses records then you are missing another trick.

A good expenses system will keep all of your records for you and will allow you to save an image of the receipts and invoices saving you space and making accessing information a doddle.

HMRC are perfectly happy with electronic records so you can be sure this is a compliant method.

Controls

In terms of VAT, expenses paid for an employee need to be reasonable. For PAYE purposes they are more prescriptive and you can’t go over certain amounts unless you want to create what is in effect a disguised payment.

One of the ways to combat this is to have clear policy guidelines for the amount that an employee can spend and then enforce these through your system.

The system only allows the employee to claim an amount for expenses that can be described as ‘reasonable’ in VAT terms and so you will be sure of being compliant.

Auditing

There are two aspects to this; the audit position and VAT inspections.

Your auditors (whether they are internal or external) will want to see that expenses are paid to policy and that you are correctly reporting VAT to HMRC.

If you get a VAT visit then you will need to have systems that can quickly show your treatment of certain items and provide the evidence to back up the claims.

A great system will help with both of these aspects and will give your auditors and HMRC the confidence that you are effectively managing your VAT on expenses and that there is little risk.

A great system gives you confidence

If you want to remain VAT compliant then using software to run your expenses procedure is the obvious way to go.

Yes, a great system will save you time and increase the control you have and the reporting you are able to do.

But importantly it will also help you to remain compliant with VAT legislation and to give your company the confidence it needs when looking at staff expenses.

While there are many options for VAT accounting software, consider the ones that best fits your needs. Choosing the right VAT software can make a colossal difference in how you streamline the VAT filing process and ensure that you're compliant with HMRC's requirements.

Our Expense Management Software includes all the features outlined above. Book a demo today so we can show you all the features and then you can decide if it's the right system for you.

In summary, claiming VAT on subsistence is possible under the right conditions. Ensure that:

• The employee is away from their usual place of work.
• The expenses are for subsistence, not entertainment.
• The amounts are within reasonable limits set by HMRC.