It is fairly common practice for companies to provide flat rate subsistence allowances for staff who are away from their normal place of work on business.
However, no VAT can be reclaimed in respect of flat rate allowances – even though the employee is likely to have ‘used it’ to buy things like meals in respect of which VAT would have been payable. In contrast, VAT can be reclaimed if the business directly reimburses the employee for specific expenses (or for a portion of those expenses).
The solution is simple. Avoid flat rate allowances and instead convert the allowance to a limit of (VAT inclusive) expenditure that can be reclaimed.
For additional tax efficiency it is also worth encouraging staff to include VAT costs in their claim rather than items with no VAT attached. For example, if the limit is £25 per night then the business would rather (all other things being equal) that this is used for claims for a hot meal (standard rated) rather than takeaway sandwiches (zero rated). This point only really comes into play when staff exceed the allowance and therefore need to select the items to make a claim for.
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