Cars and Input Tax Recovery

Peninsula Team

March 09 2012

If you buy a car, and it is “available” for private use, the VAT on the purchase is blocked from recovery as input tax. A car is available for private use when there is nothing to stop an owner or employee from using the car for a private purpose.

However if a car is used as a pool car then VAT can be recovered on its purchase. A pool car is a car normally kept on the business premises, not allocated to one individual, and not kept at an employee’s home. VAT can also be recovered on cars bought for in-house leasing to employees provided the charge made represents a commercial leasing value. On the flip side VAT would have to be declared on leasing charge.

There have been successful cases where it has been demonstrated a car was not available for private use but these have involved factors such as building a restriction in a contract of employment against private usage or purchasing car insurance which only allows business use.

An alternative to buying a car would be to lease one. With a leased car the whole of the VAT charge is not blocked. If the car is available for private use, only 50% of the VAT charged is blocked. A separate charge for say maintenance is not subject to the 50% restriction.

There remains one further alternative to buying and that is not to buy a car. Vehicles known as twin cab pick-ups if they have a badged payload of over a tonne or more are not classified as cars but commercial vehicles, and as such the block on the purchase VAT does not apply. Equally there is no block on motorcycles. With both of these options, however you would have to justify the extent of taxable business use.

Other issues with cars, is recovering the VAT on fuel purchased by the business.  Where a business pays for road fuel, if the fuel is used for business motoring only, subject to the normal rules it can claim all of the VAT. Where the fuel purchased is used both for business and private motoring, the business has three options.

a)     In the case of motor cars, it can claim all VAT charged and apply the fuel scale charge
b)     It can use detailed mileage records to separate business mileage from private mileage. This avoids using the scale charge. Records must be kept of total mileage, split between business and private mileage, and total fuel costs.
c)     It can neither claim input tax on any road fuel purchased nor apply the scale charge.

The scale charge is simply an amount added to a VAT return as output tax which is calculated from the CO2 emissions of the car, and this figure is found in the UK approval certificate. A scale charge would be worth paying if VAT on the non-business element of fuel purchased exceeded the charge.
Keeping detailed mileage records may well be onerous but if you do, this will enable you simply to apply an apportionment; based on the percentage of business mileage to total mileage, to the VAT on the fuel purchased. 

Finally the easiest option is not to reclaim any VAT on the fuel purchased. You should note that this option together with the scale charge option should be applied to all business vehicles.

If however an employee buys the fuel and a mileage allowance is paid, and the allowance was say the AA’s recommended 45p a mile, VAT could be reclaimed on the fuel element of that charge, calculated using the tables at the following link;

If the fuel element was found to be say 18p per mile, then 1/6th of that could be reclaimed as VAT. An employee however would have to hand over his fuel receipts to substantiate the claim even though they would bear no relation to the actual business mileage claim. EC legislation requires this unfortunately.

These are only some of the issues which attach themselves to cars and businesses. The golden rule is ask the question and if in doubt seek professional advice, call our TaxWise Advice Service on 01455 852555.

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