A VAT Guide for UK Production Accountants: What You Can (and Can’t) Reclaim

Navigating Value Added Tax (VAT) is essential for production accountants, assistant accountants and trainees working on UK film and TV productions. This guide breaks down what you need to know to confidently manage VAT on UK production expenses – when to reclaim, when to skip it, and how to keep things compliant.

What is VAT?

Value Added Tax, or VAT, is a consumption tax on most UK goods and services. If your production is VAT-registered, you’ll charge VAT on your own taxable services and can reclaim VAT paid on eligible purchases. Knowing when and how to reclaim can save your budget and help you to avoid penalties from HMRC.
 
New to VAT? Start here for a comprehensive overview of what it is and how it works.

What are the VAT rates?

In the UK, three primary VAT rates apply:

• Standard rate (20%) applies to most goods and services, including but not limited to equipment rental, lighting rigs, sound services, and VAT-registered crew members.
• Reduced rate (5%) covers certain energy-saving items like LED lighting, insulation, or EV chargers.
• Zero rate (0%) applies to some socially beneficial goods and services, such as children’s clothes, printed scripts, or crew travel via bus or train.

It’s important to note that zero-rated VAT is not the same as VAT-exempt items or items which are outside the scope of VAT. For a complete list of applicable rates, see HMRC’s VAT guide.

By understanding these distinctions, production accountants can be confident that they are paying and reclaiming the correct amount of VAT and maintaining compliance with HMRC regulations.
 
Now, let’s look at the guidelines for reclaiming VAT.

When can film and TV productions reclaim VAT (and when can't they)?

Film and TV productions can typically reclaim VAT on:

• Production-related services, such as equipment hire, set construction, or VAT-inclusive crew wages.
• Items purchased from VAT-registered suppliers, as long as the supplier provides a valid VAT invoice (more on that below). 
• Costs linked to taxable supplies, meaning the production generates taxable income – such as sale of assets.
• Production-only costs used solely for the business (not personal or mixed-use).  

Conversely, productions cannot reclaim VAT on:

• Non-business or personal expenses, such as client entertainment or investor dinners.
• Foreign sales taxes, like US sales tax or other non-UK taxes.
• Purchases from non-VAT-registered suppliers. In this case, there’s no VAT to reclaim – regardless of what the invoice says.
• Blocked categories, including most UK hotel stays (unless part of a continuous stay over 28 days) and certain car hires.
• Incomplete or incorrect VAT invoices, like those missing a VAT number or essential details. These need to be corrected before VAT can be claimed.

These broad guidelines are good guiding principles for evaluating what VAT is eligible to be reclaimed. Next, let’s talk about what you need to have on hand for a successful VAT claim.

Checklist for reclaiming VAT

To reclaim VAT correctly, make sure that the expense is solely for business purposes, and that you have proper documentation. For purchases under £250, a simplified invoice or receipt is sufficient.
 
For amounts over £250, a full VAT invoice is required, containing:

• The supplier's name, address and VAT registration number;
• The invoice date and a unique invoice number;
• Your company's name and address;
• A description of the goods or services;
• The VAT rate(s) applied;
• The total amount, excluding VAT (this can be in any currency); and
• The VAT amount (this must be in Sterling) 

For the full requirements and examples, see HMRC’s guidelines.

Under UK law, companies must maintain accurate financial records for at least six years, so it’s essential to have proper record-keeping processes in place. Proper documentation will also support your VAT claims and serve as evidence in the case of an HMRC review or audit.

Can you reclaim VAT charged by self-employed contractors?

You may also be charged VAT by self-employed contractors working on your production if their annual turnover exceeds £90,000 (as of April 2024). VAT on contractors is reclaimable, provided that the following criteria are met:

• The individual is VAT-registered;
• A valid VAT invoice is issued (see criteria above); and
• Their work relates to taxable production activity.

Be sure to plan budgets and cashflow accordingly, especially for higher-paid contractors.

Common pitfalls to avoid when reclaiming VAT

These common issues can jeopardise your VAT claim:

• Incomplete receipts: If your receipt is missing required details like the supplier’s VAT registration number, ask them to correct it.
• Vague descriptions or non-itemised receipts: Whether you can reclaim VAT depends on the type of goods, so receipts need to be specific. Vague descriptions like “shirts” could refer to adult shirts (standard rated) or children’s shirts (zero-rated). Likewise, “office supplies” could refer to stationary (standard rated) or books (zero rated).
• Ineligible claims: Remember that you can’t reclaim VAT on certain expenses (like client entertainment).
• Unregistered suppliers: If there’s no VAT registration number, there’s no VAT to reclaim.
• Refunds not reflected: If you return an item or claim a refund, make sure to update your VAT return to reflect any VAT refunded.
• Incorrect VAT rates: When preparing your VAT return, be sure to check the rate applied to each item you’re reclaiming VAT on.
• Partial exemption issues: Some VAT may not be recoverable if your company earns taxable and exempt income.
• Bad debts: If you’re not paid, your VAT position may need adjusting.

Handling VAT on international transactions

VAT gets trickier when international suppliers are involved. To understand how your production should navigate VAT on international vendors, here are four common international VAT scenarios:

1. Importing goods (physical items)

When importing items like props or costumes, you’ll typically be charged import VAT at 20%, calculated on the customs value (item cost + shipping + insurance).
 
You can reclaim VAT on imported goods if:

• The goods are for business use; and
• You include your VAT number on the customs declaration.

Productions can also avoid upfront payments by using Postponed VAT Accounting (PVA) to defer payment to their VAT return and improve cash flow.

Example: A production imports £10,000 worth of costumes from the United States. An import VAT of £2,000 (20%) is applied. Using PVA, the production declares the £2,000 as both input and output VAT on their return, and no upfront cash payment is required.

2. Importing services (aka intangible items)

When buying services (e.g., editing or VFX) from overseas vendors, place-of-supply rules apply.
 
These rules state that for business-to-business (B2B) transactions, VAT is due where the customer is located. On the other hand, VAT is due where the supplier is located for business-to-consumer (B2C) transactions.

Most production expenses are B2B, which means another special rule called the reverse charge mechanism applies.

When B2B services are imported from a non-UK supplier, no VAT is charged by the supplier. In this instance, UK productions must self-account for VAT by declaring both input (reclaimable) VAT and output (payable) VAT on their return. If applicable services are directly tied to the production’s taxable business activities, self-accounted VAT can typically be reclaimed, making it cost-neutral.

Example: A UK production hires a US-based VFX house for £5,000. The supplier does not charge VAT. The UK production must apply the reverse charge, adding £1,000 of output VAT (20%) to their VAT return. When the return is submitted, the same £1,000 is recorded as input VAT, effectively canceling out the tax liability.

3. Temporary imports for short-term production needs

In some circumstances, productions can use the temporary admission scheme to import goods temporarily without paying full import VAT and customs duties.
 
To take advantage of this option, productions must declare their intent to re-export the items within a set timeframe using an international customs document called an ATA carnet.

Example: A UK production rents camera equipment from a US company for a two-month shoot in London. Using an ATA Carnet, if all conditions are met, the equipment enters and exits the UK without incurring VAT or customs duties.

4. International exports

Most international exports are zero-rated, meaning there's no VAT charge, but VAT can be reclaimed on related costs.
 
To qualify for zero-rating, you must obtain and retain evidence – commercial transport documents, export declarations, and proof of receipt by the customer – that the goods have been exported.

These guidelines can help you manage VAT efficiently while maximising recoverable costs. Investing in the right software can also be a huge help.

Simplify VAT compliance with EP's SmartAccounting

Navigating VAT across your UK productions can feel daunting, but it doesn’t have to be. SmartAccounting is designed to streamline financial processes and simplify VAT management and compliance on UK productions.

Key features of SmartAccounting:

• Exchange rate integration: SmartAccounting seamlessly integrates with HMRC to automatically fetch and update exchange rates to be used for VAT calculations, ensuring accuracy and compliance with HMRC standards.
• Pre-configured, customisable VAT codes: Save time and ensure accurate processing with pre-configured VAT codes which align with HMRC guidelines or customise your own codes to align with your existing chart of accounts.
• VAT calculated automatically on transactions: Selecting the relevant VAT code on a line item in SmartAccounting will automatically calculate the VAT amount.
• Comprehensive VAT reporting suite: SmartAccounting offers a diverse suite of VAT reports, including a VAT reconciliation report which identifies variances between VAT box totals and Trial Balance VAT totals, supporting accurate VAT charges or claims.
• Automated tax codes for Reverse Charge and Import VAT mechanisms: SmartAccounting helps to ensure accurate mapping to VAT report boxes, streamlining compliance and simplifying tax reporting for productions handling complex import transactions.
• VAT discrepancy notifications: SmartAccounting increases transaction accuracy by alerting users to VAT mismatches, enhancing compliance and reducing errors.
• Extensive VAT guardrails: SmartAccounting enhances the integrity and accuracy of financial records by implementing robust controls over VAT code modifications and assignments.
• Prevention of double taxation in ledgers: SmartAccounting helps to prevent overstated VAT reporting on transactions by ensuring that VAT codes cannot be assigned to transactions being coded to a VAT trial balance account.

Plus, SmartAccounting is HMRC-recognised and fully compatible with Making Tax Digital rules.

Want to find out more about how SmartAccounting can streamline VAT management and compliance across your next production? Contact us today!