Whilst it’s rarely possible to reclaim the VAT paid on the purchase price of a car, the position for leasing one is far more generous. How much will HMRC allow?
Rules and exceptions
HMRC rigorously polices the rule that the VAT paid on the purchase of a car can’t be reclaimed if there’s any private use at all. Cars used as taxis or as driving school vehicles are exceptions, although you might need to account for VAT for any private use. However, the so-called VAT block on cars doesn’t apply to leased cars and, since June 2019, purchases on similar terms using personal contract purchases (PCPs).
The 50/50 rule
Where you lease or buy a car using a qualifying PCP with the intention that it will be and is used by you or an employee of your business, you can reclaim 50% of the VAT charged on the lease payments.
Tip. The percentage you can reclaim isn’t affected by the amount of private use of the car. As long as there is some business use, 50% of the VAT charged by the leasing company can be reclaimed.
Lease or purchase?
It can be difficult to determine whether a contract is of the type which will entitle you to reclaim the VAT. The easiest way to check is to look at the invoices/requests for payment you receive from the finance company. As a rule of thumb, if each payment you make includes an amount for VAT you can reclaim 50%. If it doesn’t, you might need to look closer at the paperwork. If you’re still unsure of the VAT status, phone the finance (leasing) company and ask.
Don’t be fooled by paperwork
Finance companies often issue a VAT invoice once a year in advance and show all instalments due over that period. In the interim they might send you requests for payment or payment receipts which don’t show VAT.
You might therefore conclude that you haven’t been charged VAT and as a result not claim what you’re entitled to. Therefore, ensure you obtain a VAT invoice for your payments at least once a year.
Tip. You may be entitled to claim more than 50% of the VAT charged for additional costs included in your lease or PCP payments.
VATable extras
The 50% rule doesn’t apply to maintenance charges included in a lease or PCP that cover servicing and wear and tear costs if they are shown separately on the invoice/demand for payment.
Tip. An HMRC concession means that you’re entitled to reclaim 100% of VAT paid on separately-charged amounts for maintenance/services etc. This applies even there is private use of the car by you, your family or an employee.
Tip. You can also reclaim 100% of the VAT you pay where your business arranges and pays for the cost of the servicing, etc. Again, this isn’t affected by any private use of the car.
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.