Input VAT Recovery: What Your Limited Company Can and Cannot Reclaim

Input VAT recovery is the right of a VAT-registered limited company to reclaim the VAT it pays on business purchases, offsetting that against the VAT it charges customers, but the reclaim only applies to costs used for taxable business activities and specifically excludes items such as business entertainment and cars available for private use. Once your company completes VAT registration in the UK, every purchase invoice becomes a potential reclaim and every mistake a potential penalty, so knowing exactly what qualifies is central to getting VAT right. Blue Tick Accountants, a Guildford-based UK tax advisory and accountancy practice, helps small limited company owners register at the right time, choose the right scheme, and reclaim every pound of VAT they are entitled to without straying into costs HMRC will disallow. This article explains when your company must register, how input VAT recovery works, which costs are blocked, and how the main VAT schemes change what you can reclaim.

Key Takeaways

• The VAT registration threshold for 2026/27 is £90,000 of taxable turnover in any rolling 12-month period, and companies expecting to exceed it in the next 30 days must also register.
• Input VAT recovery lets a VAT-registered limited company reclaim the VAT on goods and services bought for taxable business use, reducing the net VAT paid to HMRC.
• VAT on business entertainment and on most company cars available for private use cannot be reclaimed, even when the cost is genuinely for the business.
• A company can reclaim VAT on stock bought up to four years before registration and on services bought up to six months before, provided the items are still used in the business.
• The VAT Flat Rate Scheme is open to businesses with taxable turnover up to £150,000 and generally removes the ability to reclaim input VAT, except on capital assets costing £2,000 or more.
• Every input VAT claim must be supported by a valid VAT invoice; without it, HMRC can refuse the reclaim on enquiry.

When Must a Limited Company Register for VAT?

A limited company must register for VAT once its taxable turnover exceeds £90,000 in any rolling 12-month period, or when it expects to exceed £90,000 in the next 30 days on its own. The test looks back over the previous twelve months at the end of each month, so a company with a strong run of sales can cross the line partway through its accounting year rather than neatly at the year end.

Taxable turnover means all standard-rated, reduced-rated and zero-rated sales, measured before deducting costs. Because it is a turnover measure and not a profit measure, VAT registration for a limited company in the UK can be triggered even when the business is barely profitable. Once registered, the company must charge VAT on its taxable sales and can begin recovering input VAT on its purchases, which is where careful record-keeping starts to pay off. For a full overview of registration, schemes and returns, see our guide to VAT for limited companies.

How Does Input VAT Recovery Actually Work?

Input VAT recovery works by subtracting the VAT your company has paid on purchases (input tax) from the VAT it has charged on sales (output tax), so you pay HMRC only the difference. If your company charges more VAT than it pays, you send the balance to HMRC; if it pays more than it charges, HMRC refunds the difference.

The reclaim applies only to purchases used for taxable business activities, and you must hold a valid VAT invoice showing the supplier's VAT number and the VAT charged. Common recoverable costs include stock, raw materials, equipment, software subscriptions, professional fees and business travel.

Worked example: in a quarter a small limited company charges customers £30,000 of output VAT and pays £8,000 of input VAT on stock, software and accountancy fees. It pays HMRC the £22,000 difference. If in a quieter quarter it charges £6,000 of output VAT but spends heavily, paying £9,000 of input VAT on new equipment, HMRC refunds the £3,000 net. Recovering input VAT accurately therefore has a direct effect on the company's cash position each quarter.

What Input VAT Cannot Your Company Reclaim?

Your company cannot reclaim input VAT on business entertainment, on most company cars available for private use, or on any purchase that relates to exempt or non-business activities. These blocks apply even when the spending is entirely legitimate for the business, which is why they catch owners out.

Business entertainment, such as taking clients to lunch or to an event, is specifically blocked from VAT recovery under HMRC rules. VAT on a company car is normally irrecoverable unless the car is used wholly for business with no private use available, a high bar that most director cars fail; VAT on commercial vehicles such as vans used for business is recoverable. Where a cost is used partly for business and partly privately, only the business proportion can be reclaimed, and purchases linked to VAT-exempt supplies cannot be reclaimed at all. Getting these distinctions wrong is one of the fastest routes to a VAT enquiry.

Can You Reclaim VAT on Costs Before Registration?

Yes, a limited company can reclaim VAT on certain purchases made before it registered, within strict time limits. You can reclaim VAT on goods still held by the business, such as stock and equipment, bought up to four years before registration, and on services bought up to six months before, provided both relate to the taxable business.

This pre-registration recovery can produce a useful one-off reclaim on the first VAT return, particularly for a company that invested in equipment or stock while building up to the threshold. To claim, the goods must still be on hand or in use at the date of registration and you must hold valid VAT invoices. A company that registers after buying £10,000 of qualifying equipment plus VAT in the previous year, and still uses that equipment, can typically recover the £2,000 of VAT on its first return. Among the small business VAT schemes, note that the Flat Rate Scheme changes this position, so the pre-registration reclaim is most valuable to companies on standard VAT accounting.

VAT recovered is not profit, and it is the cost net of recoverable VAT that enters the computation explained in our guide to corporation tax.

How Do VAT Schemes Change What You Can Reclaim?

The VAT scheme your company chooses directly changes its ability to recover input VAT. On standard VAT accounting you reclaim input VAT on each qualifying purchase, but on the Flat Rate Scheme you pay a fixed percentage of your VAT-inclusive turnover and generally cannot reclaim input VAT at all, except on capital assets costing £2,000 or more including VAT.

The Flat Rate Scheme is open to businesses with taxable turnover up to £150,000 and suits companies with low costs, where the fixed percentage leaves more VAT in the business than detailed reclaims would. A company with high recoverable costs is usually better off on standard accounting so it can reclaim input VAT in full. The Cash Accounting Scheme, available up to £1.35 million of turnover, lets you account for VAT when invoices are actually paid rather than issued, which helps cash flow but does not change what is recoverable. Choosing between these small business VAT schemes is a numbers exercise worth running before you commit.

Frequently Asked Questions

What is the VAT registration threshold for a limited company in 2026/27?

The VAT registration threshold for 2026/27 is £90,000 of taxable turnover measured over any rolling 12-month period. A limited company must register when its turnover exceeds £90,000 in the past twelve months, or when it expects to exceed £90,000 in the next 30 days. The deregistration threshold is £88,000.

Can my limited company reclaim VAT on a company car?

In most cases no. VAT on a company car is only recoverable if the car is used wholly for business with no private use available to anyone, which is very difficult to prove for a director's car. VAT on commercial vehicles such as vans used for business, and on genuine pool cars, can usually be reclaimed in full.

Can I reclaim VAT on client entertainment?

No. VAT on business entertainment, including client lunches, hospitality and events, is specifically blocked from recovery under HMRC rules and cannot be reclaimed even when the cost is a legitimate business expense. VAT on staff entertainment, such as a reasonable annual company event for employees, can generally be reclaimed.

Can I reclaim VAT on purchases made before I registered?

Yes, within limits. A limited company can reclaim VAT on goods still held by the business bought up to four years before registration, and on services bought up to six months before, provided they relate to the taxable business and you hold valid VAT invoices. The reclaim is made on the company's first VAT return.

Does the Flat Rate Scheme let me reclaim input VAT?

Generally no. On the VAT Flat Rate Scheme you pay a fixed percentage of your VAT-inclusive turnover and cannot reclaim input VAT on most purchases. The exception is capital assets costing £2,000 or more including VAT, on which you can reclaim. The scheme is open to businesses with taxable turnover up to £150,000.

How Blue Tick Can Help

Blue Tick Accountants helps small limited company owners register for VAT at the right moment, choose between standard, flat rate and cash accounting schemes, and reclaim every pound of input VAT they are entitled to while steering clear of blocked costs. The team reviews your purchase records, sets up Making Tax Digital compatible bookkeeping, and prepares accurate quarterly returns so nothing recoverable is missed and nothing disallowed is claimed. If you want confidence that your VAT is both maximised and compliant, a Blue Tick VAT specialist can review your position. Head to our website and book a meeting now.

Conclusion

Input VAT recovery can meaningfully reduce what your limited company hands to HMRC each quarter, but only when you reclaim on genuine business costs, hold valid invoices, and avoid the blocked categories of entertainment and private-use cars. Register on time once your turnover approaches £90,000, pick the scheme that fits your cost profile, and keep clean digital records. Reviewing your VAT position with an adviser before problems arise is the surest way to keep more of your money and stay out of an HMRC enquiry.

About the Author

This guide was written by Leon, founder of Blue Tick Accountants, a Guildford-based UK tax advisory and accountancy practice that helps limited company owners, landlords and the self-employed across the UK. Leon is a chartered tax adviser and accountant, and this article was last reviewed for the 2026/27 tax year.

This article is intended for general informational purposes only and does not constitute tax, legal, or financial advice. Tax rules are subject to change and their application will depend on your individual circumstances. You should always seek advice from a qualified professional before taking action. Blue Tick Accountants accepts no liability for decisions made on the basis of this content.

Related reading: VAT on Entertaining Clients: The Rules That Trip Up Many Directors.

Related reading: Going Over the VAT Threshold Mid-Year: What Your Limited Company Must Do.