Most finance teams believe they're reclaiming VAT on expenses. Most aren't, or at least not fully. Not because anyone means to leave money on the table, but because the process that's supposed to catch reclaimable VAT is often broken. It’s the same process that produces incomplete receipts, misclassified spend, and half-finished claims that no one has time to chase.
The result is a predictable, quiet leak of recoverable tax every month, across companies that still process expenses manually. If you handle expenses for your company, there’s a good chance you’re in this category. In this guide, you’ll learn where VAT leakage typically happens and how to plug the hole without adding to your team’s workload.
Where does VAT leakage happen?
In theory, you could miss out on VAT reclaims across a whole host of areas, but when it comes to expenses, we typically see the same suspects time and time again:
1. Mileage and fuel
This one is widely misunderstood. When employees claim mileage at the approved rate (usually set by national tax authorities), there's no VAT to reclaim — the rate is a flat reimbursement, not a VAT-inclusive purchase.
But when employees pay for fuel directly and submit fuel receipts, VAT is reclaimable on the business proportion of that fuel. The problem is that most companies reclaim either too much (for example claiming VAT on the full receipt, including personal mileage) or too little (not claiming at all because the split is too hard to calculate). This almost always requires manual judgment, not to mention extra work, that’s rarely welcomed in an expense approval process.
2. Client entertainment
This is the category that trips up even experienced finance teams. In most jurisdictions — including the UK — VAT cannot be reclaimed on client entertainment. Staff entertainment (like a team lunch, or a celebration dinner) is reclaimable however, subject to conditions.
This mistake is rarely deliberate. An employee might submit a dinner receipt, and the approver sees a valid VAT receipt and lets it through — after all you can’t expect everybody in the company to know the latest tax rules. Often, a company’s expense process won’t require them to list out the purpose of the dinner, or ask who was there. If any client or customer was present, the claim is non-compliant.
Conference fees present a similar challenge. They often bundle VATable elements with exempt or non-business components (such as a social dinner or entertainment), and the VAT on the full fee may be reclaimed without apportionment.
So without an easy system to identify what’s claimable and what’s not, many companies will simply let it slide, with the lost VAT deemed less than the cost of the manual work required to pick each and every claim apart.
3. Home office costs
Hybrid working created a new expense category that many VAT processes aren't set up to handle cleanly. When employees purchase equipment or supplies for home office use, VAT is reclaimable on the business proportion — but only if:
the item is genuinely for business use
the company is reclaiming VAT on its own registration, with proper documentation linking the purchase to business use
there's a valid VAT receipt that names the company
Most home office expense claims fail on at least one of these points. The receipt might be in the employee's name, the business/personal split might not be documented, or the receipt doesn't contain the required VAT number and breakdown. And because home office spending tends to be frequent and low-value, these claims rarely get scrutinised individually, the errors just accumulate quietly.
4. Mixed-use purchases
Any expense that covers both business and personal use requires a documented split, and VAT is only reclaimable on the business portion. In practice, this is one of the most common areas for leakage, because the split is rarely calculated or recorded.
Subscriptions, software tools, and professional memberships are all common examples An employee might claim a full subscription at 100% business use when they also use it personally, and no one asks how the split was determined. Training costs also add another layer of complexity, as a single VAT invoice can include a mix of VATable, exempt, and zero-rated elements (such as books or e-learning modules), and VAT is often reclaimed on the total without reviewing the breakdown.
The pattern is the same across all of these: most claims are made at 100% business, receipts don't always show VAT at the correct rate, and no one documents how it’s split.
Why are VAT reclaims still inaccurate?
The gap between what's reclaimable and what's actually reclaimed isn't a knowledge problem. Most finance managers know the rules exist; the system is simply not set up to make adhering to them easy.
Manual expense processing puts the burden of VAT accuracy on the person least equipped to handle it: the employee submitting the claim. They don't know which rate applies, or when a category is blocked from recovery — they simply submit the receipts they have and move on.
By the time the claim reaches finance, there are 40 others in the queue and correcting each one would add a huge amount of work to an already stretched team, distracting them from real, strategic work. So the default is to approve what looks complete and flag what's obviously wrong. Subtle errors get through and while each one may be small, they quickly add up over the course of a year.
How to get accurate VAT reclaims
To reclaim VAT on an expense, you need:
A valid VAT receipt — this should show the supplier's VAT number, the date of supply, a description of the goods or services, the net amount, the VAT rate, and the VAT amount. A card receipt or a bank statement are not VAT receipts.
Correct categorisation — the expense must be in a reclaimable category. Some costs are blocked from VAT recovery entirely (such as client entertainment in the UK), regardless of whether a valid receipt is held, so employees and approvers need to understand which categories qualify.
Correctly apportioned claims — where a personal/business split applies, such as in fuel claims or home office equipment, the calculation must be both documented and defensible. Claiming the VAT on the full receipt when only part of the spend is business-related is a compliance risk, so you need clear rules for how these expenses are being apportioned, as well as a way to enforce them.
Consistent application — tax authorities expect your approach to be consistent. If you reclaim tax on some fuel receipts and not others, or apply different treatments to similar claims across teams, that’s a pattern that could potentially be a problem further down the line.
While it’s not complicated on a per-receipt basis, it does require structured, accurate data at the point of capture — something that's nearly impossible to achieve consistently when expense processes are predominantly manual.
How AI and automation help with VAT reclaims
As we’ve seen, a lot of the challenges of reclaiming VAT on employee expenses stem from highly manual, time-consuming processes. In many cases, it’s often more cost-effective to leave money on the table rather than invest hours of a highly-trained finance professional’s time in solving the problem.
That’s where new innovations like AI and automation are playing a big role. When AI reads a receipt rather than a human, it allows all the questions we’ve covered above to be answered automatically.
Does this receipt contain a valid VAT number? What rate has been applied? Does the category match the reclaimable rules? Is there a split to calculate?All of these questions are asked, and answered, to a high degree of accuracy in a fraction of a second. And unlike traditional OCR (optical character recognition), which can extract text but not interpret it, AI understands context: it can validate a receipt’s contents, not just read them, across a multitude of different formats.
Perk's AI automatically extracts and structures the data from every receipt or transaction that comes into the platform. So when it comes to VAT, it recognises the rates, understands business/personal split requirements, and applies the relevant rules in the different countries where your teams operate.It means finance teams can trust the system to capture accurate data, ensuring the error rate drops and the reclaim goes up. And if ever you need to check in on what’s happening, there’s an audit trail of everything.
Applying AI and automation at scale is a game-changer for companies. At Perk, we’ve seen expense processing costs drop as much as 79% as finance teams spend less time manually policing the system and more time on real work.
VAT is just part of that — there’s also the time saved chasing incomplete submissions, re-reviewing flagged claims, and correcting errors.
Check your expense claims for VAT leakage
One practical thing you can do this week is to get a clear sense of where the gaps might be in your company. Start by pulling a sample of last month's expense claims — 20 or 30 is enough — and check them against the categories we’ve talked about.
Look at questions like:
How many fuel receipts were claimed without a business/personal split documented?
How many entertainment claims include external attendees but claimed VAT anyway?
How many home office receipts are in an employee's name rather than the company's?
You don't need a full audit to get a clear sense of where the gaps are. A sample will tell you whether this is a minor issue or a significant one.
If it's significant, the fix isn't a training programme or a stricter expense policy. It's an expense management process that captures the right data at source and applies automation and AI to verify every claim, so that your finance team can focus on the work that actually needs their expertise.
:format(webp))
:format(webp))
:format(webp))
:format(webp))
:format(webp))