Tax Factor
28 July 2011
VAT and motor vehicles – some practical points
In 1973, the Chancellor introduced VAT as a new simple tax. However, the rules are far from simple as the complexities surrounding motor vehicles illustrates. This article provides some practical points of general application.
Can input VAT be reclaimed on the purchase of a motor car?
Input VAT cannot be reclaimed on the purchase of a motor car available for private use. This is a non-deductible expense. However, if there is a contractual arrangement which prevents private use, or the car is used purely in a business such as a driving school or taxi firm then input tax can be claimed.
Does that mean that input VAT can’t be claimed on car repairs or servicing costs either?
No. Input tax on the cost of servicing or repairs of motor vehicles can be reclaimed in full provided that there is some business use. There is no need to make any adjustment for private use. This includes VAT on invoices from insurance companies provided it relates to repair work.
What about other motoring costs. Can input VAT be reclaimed on anything else?
You can generally recover the VAT on all other business motoring expenses like fleet management or off-street parking.
There are special rules for reclaiming VAT on road fuel used for business purposes and you can choose from one of the following four options:
- Reclaim all of the VAT. You must use the fuel only for business purposes.
- Reclaim all of the VAT and pay the appropriate fuel scale charge - this is a way of accounting for output tax on fuel that your business buys but that's then used for private motoring.
- Reclaim only the VAT that relates to fuel used for business mileage. You'll need to keep detailed records of your business and private mileage.
- Not reclaim any VAT. This can be a useful option if your mileage is low and also if you use the fuel for both business and private motoring. If you choose this option you must apply it to all vehicles including commercial vehicles.
If you're on the Flat Rate Scheme, the VAT on your fuel usage is already taken into account in the flat rate percentage for your sector. You don't claim back any VAT on fuel, and you don't use the fuel scale charge to pay VAT on fuel used for private motoring
Can input VAT be reclaimed on car leasing?
There is a 50% input tax block on leasing cars for business use in order to recognise the private use factor. This 50% deduction is a special concession granted to the UK by the EU until at least 2015.
Does this 50% restriction apply to self-drive hire cars?
If you hire a car just to replace a company car that's off the road, then you'll only be able to reclaim 50% of the VAT on the hire charge. If however you hire a car for another reason, then you can reclaim all the VAT so long as you hire the car for no more than ten days and you use it specifically for your business.
Does VAT need to be charged when I sell a car on?
Broadly speaking, if you sell a car for which you were able to reclaim VAT (for example a pool car) then you'll have to charge VAT on the full selling price of the car. If you couldn't reclaim the VAT on the original purchase price of a car you bought new, you won't have to charge any VAT when you sell it.
VAT is far from being a simple tax. If you have any questions please contact Wilkins Kennedy and we will be happy to assist.
