How to reclaim VAT on mixed-use home expenses for sole traders using Xero

Working from home raises a recurring question for many sole traders: can I reclaim the VAT on my home expenses, and if so, how do I record it properly in Xero? I've helped lots of small business owners sort this out, and the short answer is: you can reclaim VAT on the business proportion of expenses only where VAT has actually been charged by the supplier, and you must make a fair, supportable apportionment between business and personal use. Below I walk you through the rules you need to know and a practical, Xero-friendly workflow that I use with clients.

What qualifies and the basic rule

The fundamental principle is simple: VAT can only be reclaimed on purchases that include VAT on the invoice and that relate to your taxable business activity. If an expense is used both for personal and business purposes (mixed-use), you must apportion the VAT and only reclaim the business share.

You must have a valid VAT invoice showing VAT charged by a VAT-registered supplier.

The expense must be used for supplies on which you charge VAT (i.e. VATable sales). If most of your sales are VAT-exempt, you may be restricted or need to make partial exemption adjustments.

If you use the VAT Flat Rate Scheme, your ability to reclaim VAT on purchases is limited — you generally cannot reclaim VAT on most purchases except for certain capital assets.

Typical home expenses where VAT can arise

Examples where VAT may be charged (and therefore potentially reclaimable) include:

Business proportion of broadband / home internet if the supplier charged VAT.

Mobile phone and business calls (if VAT charged).

Office equipment and supplies bought for the home office.

Cleaning services or repairs which include VAT and are partly for business use.

Note: many domestic household supplies are charged under different VAT rules. If no VAT is shown on the invoice, there is nothing to reclaim.

How to apportion mixed-use expenses

Apportionment needs to be reasonable and documented. Common methods are:

Time-based: business hours vs total hours (useful for internet where you can estimate hours used for work).

Area-based: proportion of rooms or square metres used for business (useful for home insurance, rent where VAT applies).

Usage-based: number of business calls / total calls, or actual meter readings if separate sub-meters exist.

Whichever method you pick, keep a simple calculation and supporting evidence. HMRC expects a sensible, consistent approach — I recommend documenting your method in a one-page note stored with the invoices.

Practical Xero workflow — step by step

Here’s the process I use in Xero. It assumes you are not on the Flat Rate Scheme and that the supplier has charged VAT.

Create a contact for the supplier in Xero and upload the supplier’s VAT invoice (attach the scanned invoice to the bill).

Enter the bill or spend money transaction in Xero. If the invoice shows VAT, enter the full gross amount and select the appropriate tax rate (e.g. 20% VAT).

Split the line into two lines on the bill: one for the business portion (where you apply the VAT rate) and one for the personal portion (net cost only). For example, if broadband is £60 including VAT and 40% is business use, create a line for 40% (£24) and apply the VAT rate to that line; the remaining £36 goes to a non-VAT code such as “Drawings” or “Personal use”.

Attach your apportionment note or calculation as an additional attachment or include the calculation in the bill’s reference field. This makes the rationale obvious at a glance and helps if you are ever queried.

Use a tracking category (e.g. “Home business vs Personal”) if you want reports that show total business-only expenditure. Tracking categories are useful for month-by-month comparisons.

If the supplier did not charge VAT (for example many household energy bills show VAT differently or are zero-rated for domestic users), you cannot reclaim VAT — but you may still apportion the net cost as a business expense for profit calculation.

Example apportionment — table

Item	Gross	Business %	Business share (gross)	Recoverable VAT
Broadband invoice	£60.00	40%	£24.00	£4.00 (assuming 20% VAT)
Phone plan	£30.00	50%	£15.00	£2.50

In Xero you would enter the broadband bill split into two lines: £24 at the VAT rate (20%) and £36 to a drawings/personal account. The VAT reclaimable will be the VAT attached to the £24 line (£4). Keep the calculation file with the bill.

Special case: VAT Flat Rate Scheme

If you are on the Flat Rate Scheme (FRS), the general rule is you cannot reclaim VAT on most purchases — the scheme is designed to simplify VAT by applying a fixed percentage to your turnover. There is one notable exception: you can reclaim VAT on capital assets over £2,000 (ex-VAT) even while on FRS. If you are on FRS, check your scheme rules carefully before attempting to reclaim input VAT on home expenses.

Record-keeping and common pitfalls

Some common mistakes I see and how to avoid them:

Claiming VAT where there is no VAT on the invoice — always check the supplier invoice for VAT and their VAT registration details.

Using a vague apportionment — pick a method (time/area/usage), apply it consistently, and save the calculation.

Failing to split lines in Xero — if you enter the full gross amount as business without splitting, you’ll overclaim VAT. Always split the invoice into the business proportion (with VAT) and the personal portion (no VAT recovery).

Forgetting to attach supporting evidence — HMRC wants to see the invoice plus how you worked out the business percentage.

What to note on your VAT return

Only include the VAT you have legitimately reclaimed (the VAT on the business-proportion lines) in your VAT return input VAT box. If your business makes exempt supplies or is partially exempt, you may need a partial exemption adjustment — speak to your accountant if you’re unsure.

If you’d like, I can prepare a short template spreadsheet you can use to calculate monthly business use percentages and a checklist for filing the supporting evidence in Xero. I also review clients’ Xero setups to ensure the apportionments and VAT coding are correct — happy to help if you want a hand setting this up.