You’re starting major renovations to your home. They could take a couple of years during which you’ll borrow your firm’s truck and other equipment. Are there any VAT consequences for your business?
Self-supply
The basic principle of VAT is that if you’re registered you must charge VAT on supplies you make, unless they are exempted, and are entitled to reclaim VAT on paid purchases used to make the supplies. This includes supplies made by a business to its owners. This is called a self-supply.
Trap. Private use of equipment owned by your business counts as a self-supply.
VAT on self-supplies
HMRC’s rules allow you to reclaim VAT and account for private use in one of two ways: either reclaim all the VAT and then repay some of it according to the level of private use, or claim only the proportion of the VAT that represents what you expect the business to use. The latter seems like the simple choice to make when you buy a new asset, but what if you already own it?
Example. Your company purchased the van over four years ago, and reclaimed the full amount of VAT paid which was £3,000. You’re not allowed to retrospectively adjust the claim and, besides, the business has been using the van for four years, so what should you do?
Is it too late?
In this situation you can use the so-called Lennartz method to balance the books. It doesn’t matter that the full amount of VAT has been claimed but you must pay HMRC for any subsequent private use. There’s no need to keep a running timesheet of the minutes and seconds you spend using the van, but you will need to be able to quantify the business vs personal use using a fair and reasonable method. For example, if the van is used for the business Monday – Friday and you will use it every Saturday, the business use is 83% and the private use is 17%.
Calculating the self-supply VAT
You calculate the VAT by applying the following formula: A/B x (C x U%), where A is the number of months in the VAT return period (usually three), B is 60 months (unless you know you’ll be getting rid of the van before then), C is the cost of the van (excluding VAT), i.e. £15,000, and U is the percentage of private use in the VAT period. The amount of VAT you must account for is 3/60 x (15,000 x 17%) = £127.50, which at 20% VAT is £25.50. You can adjust the private use percentage in each VAT period if it varies.
How long are adjustments required?
HMRC deems the life of an asset to be five years, i.e. 60 months, and for the purposes of our private use calculations, the five-year period begins on the day you start using an asset.
Tip. When the five years are up, as far as HMRC is concerned you’ve paid your dues and you no longer have to account for VAT for the self-supply, even if you continue to use it privately.
Tip. If your business buys new equipment that you’ll use privately you can simply reduce the VAT reclaim by the anticipated percentage of private use. However, whilst the Lennartz method described above is fiddlier, it does give you a cash-flow advantage and means you won’t have overpaid VAT if your plans change.
Private use of an asset owned by your business counts as a supply for VAT purposes. You can either reclaim all the VAT and account for private use with each VAT return or, for new items, you can limit your initial VAT reclaim to the proportion of business use you expect for each piece of equipment.
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.