Understanding the intricacies of VAT (Value Added Tax) on vehicle purchases is not always straightforward for businesses in the UK. There are several variables to consider, including whether the vehicle is for business or private use, the kind of fuel it uses, and much more. This article aims to provide a comprehensive guide to help you navigate this complex issue, ensuring your business remains compliant with relevant tax laws.
Can Businesses Claim VAT on Vehicle Purchases?
Let’s start with the basics. As a business owner, you might be wondering: Can we reclaim VAT on the purchase of a vehicle? The answer is, it depends. If the vehicle is exclusively for business purposes, then yes, you can reclaim the VAT charged on its purchase.
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Under the scope of UK tax laws, a ‘business vehicle’ is one that is not available for private use. This means the vehicle must not be used by anyone for anything other than your business, including commuting. If there is any private use of the vehicle, even if it’s only incidental, the VAT cannot be reclaimed.
VAT on commercial vehicles, like vans or trucks that are only used for business, can be reclaimed. However, for cars, the rules are more stringent. Cars are generally seen as having a dual purpose (both private and business use), so reclaiming VAT is more complex and often not possible.
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VAT on Fuel for Business Vehicles
Next, let’s look at VAT on fuel for business vehicles. Can you reclaim VAT on fuel if you’re using the vehicle for business purposes? Yes, you will be able to reclaim VAT on fuel if the vehicle is used entirely for business. However, if there’s any private use, you need to pay the VAT on the fuel used for private journeys.
To do this, you have two options: You can either keep detailed mileage records showing business and private use, and only claim the business proportion on your VAT return, or you can use the VAT fuel scale charge. The scale charge is a way of paying VAT on private use that’s based on the CO2 emissions of the vehicle. It’s designed to save you keeping detailed mileage records.
Leasing Vehicles and VAT
When it comes to leasing vehicles, the VAT implications change slightly. If you lease a car, you can usually reclaim 50% of the VAT. For leased vans or other commercial vehicles, you can usually reclaim 100% of the VAT.
Bear in mind that these percentages apply if the vehicle is used for both private and business purposes. If the vehicle is used only for business purposes, you can reclaim all the VAT, just as with a purchase. However, if the lease includes services like maintenance or roadside assistance, you can reclaim the VAT on these services in full, regardless of the private use.
VAT on Repair and Maintenance Services
When it comes to the repair and maintenance of your business vehicles, the VAT rules are somewhat more lenient. Generally, you can reclaim the VAT charged on vehicle maintenance and repair services. This includes everything from regular services and MOTs to necessary repairs and replacement parts.
However, just like with fuel, if the vehicle is used for both business and private purposes, you will need to calculate the percentage of the cost that relates to business use and reclaim the VAT on that portion. If the vehicle is solely for business, you can reclaim all the VAT.
Charging VAT on Company Cars
The final topic we’ll cover is company cars. If your business provides a company car to an employee, and they use it for private purposes (including commuting), you will have to account for VAT. This is usually done through the VAT fuel scale charge, based on the car’s CO2 emissions.
If the company car is available for private use by an employee, then the provision of the car is seen as a taxable supply in the course of your business, and output VAT must be accounted for. The VAT is based on the market value of the car or, if lower, the cost to the employer plus any costs such as accessories or delivery charges not already included in the cost.
Remember, tax laws can be complex and change regularly. Always consult with an experienced tax advisor to ensure your business is compliant. Understanding the rules around VAT on vehicles will assist you in making informed decisions and avoid any unwelcome surprises from the taxman.
VAT Margin Scheme and Vehicle Sales
When it comes to selling vehicles, the VAT Margin Scheme can provide some relief for businesses. The scheme allows businesses to account for VAT on the profit margin of the vehicle, rather than the full selling price. This can be beneficial when selling second-hand vehicles, where the purchase price may have included VAT that cannot be reclaimed.
To qualify for the VAT Margin Scheme, the vehicle must have been bought in a way that did not allow the VAT to be reclaimed. This would typically be a vehicle bought for private use, or a second-hand vehicle where the VAT was not separately identified. If your business is VAT registered and you sell vehicles, the Margin Scheme can be an effective way to reduce your VAT liability.
Under the scheme, you calculate your profit margin on each vehicle and account for VAT on this amount. The margin is the difference between what you paid for the vehicle and the selling price. It’s important to note that you can’t use the scheme if you are entitled to claim VAT back on the vehicle’s purchase, or if you bought the vehicle from a private individual.
When it comes to completing your VAT return, you must include the total value of your sales under the Margin Scheme in your total sales figure (box 6 of your VAT return), and include the VAT on your margin in your total VAT due (box 1 of the VAT return).
Input Tax Recovery
Reclaiming input tax on the purchase of vehicles or related costs can bring a significant financial benefit to your business. In principle, a business can recover VAT it incurs on goods and services which are used exclusively for making VAT taxable supplies. This means that if you are using your vehicle solely for business purposes, you are entitled to reclaim the VAT charged on it.
Recovering input tax can be a bit tricky since it depends on the purpose for which the vehicles are used. Where a car is used exclusively for the purposes of the business, all the VAT can be recovered. Conversely, where there is any private use, the VAT cannot be recovered.
When it comes to fuel scale charge, you can recover VAT on fuel used for business purposes. However, if the vehicle is also used for private journeys, this private use is regarded as a taxable supply and output tax (based on the fuel scale charge) must be accounted for on the VAT return.
Conclusion
Navigating through the labyrinth of VAT rules on vehicle purchases and related costs can be a daunting task. However, with a comprehensive understanding of the criteria to claim and recover VAT, businesses can substantially benefit. Whether it’s reclaiming VAT on the purchase of commercial vehicles used solely for business purposes or utilising the VAT Margin Scheme for selling second-hand vehicles, every avenue for VAT recovery can bring financial relief.
However, businesses must ensure that they keep accurate records of vehicle usage, clearly distinguishing between business and private use. This will enable accurate VAT calculations and claims, ensuring compliance with tax laws and avoiding potential penalties.
Although this guide has aimed to simplify and clarify the VAT implications of vehicle purchase, use and sale in the UK, it is always advisable to consult with a tax advisor or the HMRC directly for personalised advice. As tax laws often change, always keep abreast of the latest regulations to ensure your limited company remains tax compliant.
