VAT rules for cars used in your business are notoriously strict but for some types of motor running expenses, they are surprisingly generous. John Craig explains what are they and how can you take maximum advantage of them?
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 that you paid on its purchase. Any private use whatsoever will preclude 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 ‘all or nothing’ block does not apply to motor running expenses, in fact, the VAT rules for these are the opposite of those for car purchases.
Journey related expenses
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, meaning 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 consider the cost of repairing and maintaining your car, the VAT rules are surprisingly generous.
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.
Jo 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. Jo 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. Jo is entitled to reclaim all of the VAT on her and her employees’ car service bills. Jo’s business also pays the cost for new tyres, cleaning and repair of her car, which means it can reclaim 100% of the VAT on these costs.
Tip – The VAT break can also be used by companies where they pay service bills etc. for directors, employees and, subject to conditions, even freelance contractors.
Tip – Although not vital for VAT claims, where possible you should arrange for service 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 bills for their cars exceed their entitlement to the mileage allowances (again, reduced to remove the cost of fuel element) you pay them.
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 costs etc. paid by your business.
Your business is entitled to reclaim 100% of the VAT in respect of car repair and maintenance costs which it pays for you and your workers. The usual apportionment between business and private use isn’t required. With care, this VAT break can be used in conjunction with car mileage allowances.