Your business is registered as a VAT group and is partially exempt. All cars are leased through one group member that only has taxable income. How much input tax can you claim on the leasing payments and what other issues must you consider? Associate, Bob Johnstone from our Galashiels office explains in this article.
Even though a group registration must consist of at least two companies, or a partnership/sole trader and one company in some cases, all supplies of goods and services are deemed to be made by or to a representative member, i.e. the company you nominated as the representative member when you first registered with HMRC. This means that your input tax claims are considered on a group basis rather than according to which company incurred the initial cost from the supplier.
Company A and Company B are the only members of a VAT group. A’s income is wholly exempt and B’s income is subject to 20% VAT. If B is invoiced for phone bills for both A and B, the group can only claim part of the VAT as input tax because some costs relate to A.
A partially exempt VAT group only benefits from a single partial exemption de minimis threshold rather than having a threshold for each individual member.
If your business buys rather than leases its cars, and pays VAT on the purchase price, you will be blocked from claiming any input tax if the vehicle will either be used or available to use for private trips. There must be a legal or physical restriction in place to prevent private use at the time you buy the vehicle.
If you lease a car and pay VAT on the payments to the leasing company, you can claim 50% of the VAT as input tax, irrespective of the actual percentage of private or non-business use. However, the 50% claim assumes that your business is not partially exempt, where a further restriction applies.
For pool cars, or cars that are not available for private use, the 50% recovery rate will increase to 100%.
The fact that your cars are all leased through the group member with only Vatable income is irrelevant. It is the company that uses the cars that counts. You will therefore need to divide your leasing deals into three categories:
• Cars only used by group members with Vatable income – claim the full 50% VAT paid on leasing payments.
• Cars only used by group members with exempt income – no input tax can be claimed.
• Cars used by all group members or members with both taxable and exempt income, i.e. a mixed-use outcome. The 50% VAT will be partly claimed according to the normal partial exemption method used for the group as a whole.
You must carry out one partial exemption calculation for the whole group rather than a separate calculation for each individual member. You will use the standard method of calculation based on the split of exempt and taxable income for the period in question.
You could apply to HMRC to request the use of a special method for partial exemption purposes, which is any method that is not the standard method.
Input tax claims for a VAT group depend on the use of the expense by the group rather than the individual member that receives the purchase invoice. Input tax on your car leasing payments will be restricted by 50% for private use, with a further restriction if it is used by a member with some exempt sales.
Our expert team are more than happy to discuss any further queries about VAT your business may have, please contact our reception directly.