Normal rules limit the amount of VAT you can reclaim on car maintenance bills but are overridden for some costs. When does this override apply?
All or nothing
Except in the rare situation that you can prove to HMRC that a car is used 100% for your business, it will not permit you to reclaim any of the VAT you paid on its purchase. Any private use whatsoever precludes you from claiming any VAT – it cannot be apportioned between business and private use as it can for other expenditure. The good news is that this block doesn’t apply to motor running expenses. In fact, the VAT rules for these are the antithesis of those for car purchases.
Journey-related costs
Before we look at motor running costs you should understand that the rules for these differ from journey-related expenses. The normal VAT rules apply to these. This means that VAT paid on expenses relating to a business journey, for example off-road parking charges, can be reclaimed in full. For some types of journey-related expenses you may need to apportion VAT between business and private use, as in the case of a petrol bill.
Motor running expenses
When you get to considering the cost of repairing and maintaining your car the VAT rules become interesting, in a good way.
Tip. Even where there’s significant private use of a car, HMRC allows you to reclaim 100% of the VAT paid on this sort of expenditure. This generosity isn’t confined to cars owned by your business, it also applies to those personally owned if they are used for business journeys.
Example. Fran owns and runs a cleaning business and employs two staff. All three use their own cars to travel to and from clients, and for private journeys. Fran pays the servicing costs of each car, and in the case of her employees she deducts what she pays from the mileage allowance (net of the element relating to fuel) she pays them. Fran is entitled to reclaim all the VAT on her and her employees’ car service bills. Fran’s business also pays the bills for new tyres, cleaning and repair of her car, which means it can reclaim 100% of the VAT on these costs.
Tip 1. The VAT break can also be used by companies where they pay service etc. bills for directors, employees and, subject to conditions, even freelance contractors.
Tip 2. Although not vital for VAT claims, where possible you should arrange for service etc. bills to be addressed to your business. Remember that for employees (including directors) income tax and NI charges will apply if the value of the service etc. bills for their cars exceed their entitlement to the mileage allowances (again, reduced to remove the cost of fuel element) you pay them.
How much is enough?
There’s no minimum business use requirement to take advantage of this VAT break. In theory you might only use your car for business 5% of the time, but you’ll still be entitled to reclaim 100% of the VAT on service etc. costs paid by your business.
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.