VAT Basics
Nearly all businesses incur car motoring expenses, so here is a guide to the VAT impact:
Buying a car
A business cannot recover the VAT on a car purchase, unless it:
- is a stock in trade of a motor manufacturer or dealer
- is a taxi, driving instruction car, or self-drive hire
- will be used exclusively for the purposes of your business and would not be made available for the private use of anyone
Leasing a car
If a business leases a ‘qualifying car’ for business purposes it will normally be unable to recover 50% of the VAT charged. The 50% block is to cover the private use of the car.
However, a 100% reclaim is possible if it is to be used for hire with a driver for carrying passengers or providing driving instruction.
The 50% block applies to all the VAT on charges paid for the rental of the car. This includes:
- optional services — unless they’re supplied and identified separately from the leasing supply on the tax invoice
- excess mileage charge — if it forms part of a supply of leasing but not if it was incurred on an excess mileage charge that forms part of a separate supply of maintenance
Fuel
The options for claiming input tax on road fuel are as follows:
- claim 100% of the VAT charged. This is possible if fuel is bought for business motoring only or for both business and private motoring and the appropriate fuel scale charge (see below) is applied on the value of supplies of fuel for private use
- use detailed mileage records to separate business mileage from private mileage and only claim for the business element
- claim no input tax
Road Fuel Scale Charge
A scale charge is a way of accounting for output tax on road fuel bought by a business for cars which is then put to private use. If a business uses the scale charge, it can recover all the VAT charged on road fuel without having to split mileage between business and private use. The charge is calculated on a flat rate basis according to the carbon dioxide emissions of the car. The charges are set out in the fuel scale charge table.
Mileage records
HMRC calculation example:
- Total mileage: 4,290
- Business mileage: 3,165
- Cost of fuel: £368.
- Business mileage: £368 × (3,165 ÷ 4,290) = £271.49
- Claimable input tax: £271.49 × VAT fraction = £45.25
Fuel paid for by employees
If a business reimburses its employees for fuel used it can treat the VAT they paid as its input tax. But the business must be able to show that it has reimbursed them for their actual expenditure on the fuel. If fuel bought by employees for business is put into private use, the business must account for output tax on the private use using the scale charges or the value.
Electric vehicles
Details of input tax recovery and output tax due here.
Input tax on repairs
If a vehicle is used for business purposes, there is a 100% reclaim of the VAT charged on repairs and maintenance as long as the business paid for the work and the vehicle is used for some business purposes. It does not matter if the vehicle is used for private motoring or if you have chosen not to reclaim VAT on road fuel (see below).
Other motoring expenses
Input tax incurred on all other business motoring expenses, eg; fleet management charges or parking charges is fully recoverable input tax.
Selling a car
If a car is sold on which input tax was recovered, eg; a driving school car, VAT is due on the full selling price. The supply of these vehicles are cannot be made under the second hand margin scheme.
If a car is sold where VAT was charged on purchase but could not be recovered there is no VAT due on the sale of it. Such a supply is exempt and must be consider in any partial exemption calculation. For most businesses this will not be an issue.
If a business sells a car where VAT was not charged when it was purchased, eg: from a private individual or from a dealer who sold it under the second-hand margin scheme, no VAT will be due unless the sale was at a higher value than the purchase price. In which case VAT will be due under the margin scheme.
NB: The VAT rules for commercial vehicles will differ.