What are the rules on motoring expenses and VAT?

When you buy a car, unless you use it 100% for business, you can’t reclaim any of the VAT paid on the purchase. However, more generous rules apply to the cost of motoring expenses such as accessories, repairs and so on. John Craig explains exactly what these rules are and how you can benefit from them.

VAT block
There are two situations in which your business can reclaim VAT on the purchase of a car. Motor traders can reclaim it for vehicles they buy as stock and so can businesses that use a car 100% for business. Otherwise VAT claims are blocked. However, the block doesn’t apply to vehicle running costs and related expenses.

VAT and accessories
You can’t reclaim VAT paid on the cost of car accessories and extras fitted prior to you taking ownership, whether these are added by the manufacturer or the car dealer. However, it doesn’t apply to later additions or modifications.

JRW ADVICE – You can reclaim VAT on accessories fitted after you take delivery as long as they are used for your business. For example, if you have the car customised with your firm’s livery.

Motor expenses
Like other business expenditure you can reclaim VAT paid for repair and maintenance costs (including cleaning and valeting) as long as the car is used for business some of the time. The amount of private mileage doesn’t matter.

JRW ADVICE – If your business provides a car to an employee (including a director) or member of their family as a perk, this counts as business use even if they only make private journeys in it. Conversely, if you’re a sole trader or partner in a firm and the business provides you with a car, you can’t reclaim the VAT on repair costs etc. if it’s only used for private journeys.

The usual rule which says you can only reclaim VAT in proportion to how much an expense relates to business use compared with private use doesn’t apply to car expenses. Therefore, you can reclaim all the VAT you pay on repairs etc. regardless of the level of business use.

Example:
ABCD Associates is a partnership with four partners. Each partner is provided with a car by the business. ABCD pays all the running costs. The business mileage covered by each partner is between 5% and 10% of their total mileage. However, the rules say that ABCD is entitled to reclaim 100% of the VAT paid on any repairs and maintenance bills for the cars.

Other motoring expenses
The normal rules apply for reclaiming VAT on costs indirectly relating to cars, e.g. fuel, road tolls, parking charges, etc. That is, you can reclaim VAT if the expense was for a business purpose. For example, VAT paid on parking charges incurred while visiting business customers can be reclaimed but not the VAT on parking costs for a personal shopping trip. Typically, journey related expenses are wholly for business or private use and therefore it’s usually easy to decide whether or not you can reclaim the VAT on them.

Fuel is the exception because a full tank of fuel might only be partly used for a business journey. Therefore, HMRC allows various methods of apportioning the cost.

IN SUMMARY
You can reclaim VAT on extras added after you’ve bought a car but not before you take delivery of it, but only if they have a business use. You can reclaim 100% of the VAT on running costs, e.g. on service bills, even if there is significant private use of the car. VAT on journey related expenses can be reclaimed if the journey was for business purposes.