Introduction
One particular challenge that often confuses business owners is dealing with Value Added Tax (VAT) for the costs of using vehicles (see VAT Notice 700/64 for detailed rules). VAT rules for vehicles can be really complicated, and difficult to understand for both business owners and financial advisors. The concept of the input tax block means that certain vehicles, such as most cars, are subject to restrictions on reclaiming input VAT. You might be asking yourself, what can I claim VAT back on being self-employed?
But don’t worry, in this article, we’ll make it easier to grasp how you can get back the VAT you’ve spent on your cars and business vehicles.
Bear in mind, you can only get back VAT for goods and services that you use only for your business. The vehicle must be purchased primarily for a clear business purpose, and you will need evidence to demonstrate this in order to recover VAT. You need to keep good records and have proper receipts to prove how much tax and you have spent the money on your business. These records are super important. The rules for reclaiming VAT depend on the vehicle’s classification for VAT purposes, and not all motor vehicles are treated the same way. There are many different ways to get that VAT back for example, your vehicle expenses and what makes them different from goods and services. For VAT purposes, a ‘motor vehicle’ generally includes cars, vans, and other vehicles as defined by HMRC.
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Introduction to Business Vehicle VAT
When it comes to running a business, understanding Business Vehicle VAT is essential for making the most of your motoring expenses. Business Vehicle VAT refers to the rules and regulations around Value Added Tax (VAT) for the purchase, leasing, and use of vehicles in your business. These rules can be quite different depending on whether you’re dealing with commercial vehicles, company cars, or pool cars, and knowing the difference can help you avoid costly mistakes.
For example, commercial vehicles like vans and lorries are often treated differently from company cars when it comes to VAT. Pool cars—vehicles kept at your business premises and used by multiple employees for business journeys—also have their own set of rules. The key is that VAT can only be reclaimed on business vehicles used for business purposes, and the way you use your vehicle will determine how much VAT you can claim back. By understanding these distinctions, you can ensure your business is compliant and maximising its VAT recovery.
Eligible Vehicles for VAT Claims
Not every vehicle used in your business will qualify for a VAT claim, so it’s important to know which ones do. Generally, commercial vehicles such as vans, lorries, and certain types of light commercial vehicles are eligible for VAT claims, as they are primarily used for business purposes. However, when it comes to cars, the rules are stricter. You can only reclaim VAT on a car if it is used exclusively for business and is not available for private use—even outside working hours.
If a vehicle is available for private use, such as commuting or personal errands, it usually won’t qualify for a full VAT reclaim. This is why it’s crucial to clearly document how each vehicle is used. Motor vehicles that are adapted for specific business tasks, like carrying passengers for hire or use as recovery vehicles, may also be eligible, provided they are not available for private use. Always check the specific conditions for each vehicle type to ensure you’re claiming VAT correctly and in line with HMRC guidelines.
VAT and Car Leasing:
If a business vehicle is also used for personal purposes, you can reclaim only 50% of the VAT on leasing charges. The terms of the leasing agreement determine the VAT treatment, so it’s important to review the agreement to understand your VAT obligations. However, full VAT recovery is possible for other charges like maintenance and roadside assistance. Input tax recovery on these expenses follows the normal rules for motoring expenses.
- Many companies opt for short-term leasing contracts to reclaim full VAT, but this is only possible if the hire duration is less than five days. In contrast, VAT on the purchase of a car is subject to different rules, and reclaiming VAT depends on whether the car purchase is for a company vehicle used solely for business purposes.
- VAT on Servicing and Repairs:
You don’t need a specific type of distribution to recover VAT on servicing and repairs. When it comes to getting back the VAT you paid for fixing and taking care of your business vehicle, you don’t have to worry about what kind of vehicle it is. Whether it’s a big delivery van, a small car for meetings, or even a truck, you can still get that VAT money back for the expenses you have when you’re maintaining and repairing the vehicle.
So, no matter what type of vehicle your business uses, as long as you’re spending finances on keeping it in good shape, you can claim back the VAT you paid for those services. This means you can save some money on taxes. Input tax recovery is only possible if the company vehicle is used for business purposes and the correct sales invoice is obtained.
According to HMRC rules, you can reclaim full VAT on car running costs as long as it is used for business purposes, even if it is used occasionally for personal trips. This includes things like buying fuel, getting repairs done, or paying for insurance.
Even if you sometimes use that car for personal trips, like a weekend getaway or driving to the shops, you can still get back all the VAT for the running costs as long as the main purpose of the car is for your business.
If you’re using your car mainly for work, it’s a way to encourage businesses and make expenses easier.
Surprisingly, you can also reclaim servicing costs for vehicles that do not belong to the business, such as your employees’ cars that are used for business trips.
Claims must be made in the correct VAT period, and proper documentation, such as a valid sales invoice, is required.
- VAT on Mileage Allowances:
Employees using their cars for business purposes can claim VAT on mileage allowances, typically at a rate of 45p per mile for the first 10,000 miles, and 25p per mile thereafter. The normal rules for input tax recovery apply to mileage claims, and a valid sales invoice is needed for fuel purchases.
Keep valid petrol receipts to prove your claims.
If the company pays more for mileage allowances, the excess amount may be subject to taxation. When you use your own car for work-related trips, your company might pay you some extra money for the miles you drive. This extra money is called a “business mileage allowance” and it’s meant to cover the costs of using your car for business.
If your company pays you more money for each mile you drive than what the government says is a fair amount, that extra money might be considered as part of your income, just like your regular salary. When you file your taxes, you might have to pay some tax on that extra mileage money.
For example, the government may think it’s fair to pay you 10 pence for every mile you drive for work. If your company decides to be extra generous and pays you 20 pence for each mile, that extra 10 pence might be treated like regular income, and you’d have to pay a bit of tax on it.
So, it’s essential to keep track of how much your company is paying you for mileage and whether it’s more than what the government says is fair. If it’s more, just be aware that you might owe a extra in taxes when tax season rolls around. 2. VAT on Fuel Costs:
A business can reclaim 100% VAT on fuel costs for vehicles used exclusively for business purposes.
- For company cars used for both business and personal trips, there are three options for reclaiming tax on fuel costs:
- Paying the appropriate fuel scale charge and reclaiming full VAT.
- Reclaiming VAT only for fuel used during business trips with proper mileage records.
- Not reclaiming VAT on any fuel costs if it would result in a higher fuel scale charge than the VAT you can reclaim.
The VAT period in which the fuel was purchased determines when the VAT can be reclaimed.
It’s important to note that if you choose not to reclaim VAT on fuel costs for one vehicle, you won’t be able to reclaim VAT on fuel costs for other private mileage business vehicles either.
Electric Cars and Tax Benefits
In recent years, the rise of electric vehicles has prompted many entrepreneurs to consider their use for business travel and operations. Electric cars offer several tax advantages and potential savings:
- Tax Savings with Electric Cars:
- Business owners can reclaim or save tax on the lease costs of electric vehicles, reducing the need to use personal funds for car expenses and potentially saving on dividend tax. You’re a business owner, and you’re thinking about getting an electric car for your business. Well, here’s some good news! When you lease an electric vehicle through your business, you can actually get back some of the money you spend on that lease. This money is a special type of tax called “tax relief,” and it’s like a little refund from the government. VAT can also be reclaimed on the purchase of a new car if it is used solely for business purposes.
Why could this be an issue? Well, normally, if you didn’t use your business to lease the car, you’d have to pay for it from your own personal funds, which means your hard-earned money. But by using your business for the lease, you’re saving your personal money, which is fantastic.
But that’s not all. Remember those dividends? They’re like extra money that you get from your business. Usually, when you earn dividends, you have to pay some tax on them. But, if you’re using your business to lease an electric car, you can reduce the amount of dividends you take out, which means you might pay less tax on them. These savings can also reduce your personal tax liability.
So, in a nutshell, getting an electric car for your business can help you save money by getting some of your lease costs back and possibly paying less tax on your business earnings. It’s like a win-win situation for both you and the environment.
- Electric cars typically have lower company car tax rates compared to petrol or diesel vehicles, resulting in significant savings. This is due in part to their lower carbon dioxide emissions, which result in lower benefit-in-kind rates.
- Mileage Reimbursement for Charging:
- You can claim business mileage for charging your electric company car, usually at a government-approved rate, currently around 5 pence per mile.
- However, some individuals find this rate insufficient to cover the actual cost of electricity used for charging.
- Override the Government Rate:
- You have the flexibility to override the government-approved mileage rate if your charging costs exceed the standard rate.
- Using a higher rate, such as 17 pence per mile, can provide a more accurate representation of your actual charging expenses during business journeys.
- Home Charging Expenses:
Even if you charge your electric car at home, you can still claim mileage for the cost of charging, considering the actual expenses incurred rather than relying on the government’s lower rate. If you sell your electric company car, VAT may be due on the full selling price, and the market value of the vehicle must be considered for tax purposes.
Fuel and VAT Claims
Fuel is often one of the biggest ongoing costs for businesses with vehicles, so understanding how to claim VAT on fuel is vital. You can claim VAT on fuel used for business purposes, but you need to be careful if your vehicles are also used for private mileage. If you reclaim VAT on all the fuel you buy, you must account for the private use by applying the fuel scale charge—a fixed amount set by HMRC to cover the VAT on private use of business fuel.
Alternatively, you can choose to only claim VAT on the fuel used for business mileage, but this requires keeping detailed mileage records and fuel receipts to prove the split between business and private use. The mileage allowance method is another option, where you reimburse employees for business miles driven in their own car, and claim VAT on the fuel element of that allowance. Remember, you can only claim VAT on the business fuel, not on fuel used for private motoring. Understanding the fuel scale charge, mileage allowance, and fuel element will help you claim VAT correctly and avoid any issues with HMRC.
Road Tax (Vehicle Excise Duty)
While road tax is a cost associated with company cars, it is typically not subject to VAT. (Road tax is also known as vehicle excise duty.) Businesses pay road tax directly to the Driver and Vehicle Licensing Agency (DVLA) or through their vehicle leasing company, and this payment does not involve the collection or remittance of VAT.
Reclaiming VAT on vehicle expenses such as motoring and travel, can be a complex process, but understanding the rules and methods available can help businesses maximize their tax benefits. VAT incurred on vehicle purchases, fuel, and maintenance can be reclaimed if the correct procedures are followed. Additionally, the adoption of electric vehicles for business purposes opens up new avenues for tax savings. By reclaiming VAT on lease costs for business use, taking advantage of lower company car tax rates, and optimizing mileage reimbursement for charging, entrepreneurs can reduce motoring expenses while contributing to sustainable transportation practices. Sole proprietors can also reclaim VAT on vehicle expenses if the vehicle is used for business purposes. Be sure to consult with tax experts and stay informed about changing regulations to make the most of these opportunities for your business.
VAT recovery rules differ for commercial vehicles, self drive hire vehicles, vehicles used for driving instruction, pool cars, car derived vans, mobile shops, and ice cream vans. Vehicles capable of carrying only one person or adapted for special purposes may be excluded from standard VAT recovery rules. When selling a vehicle, VAT may need to be charged on the selling price, especially if VAT was reclaimed on the purchase, and the VAT margin scheme may apply for used vehicles. The sales invoice, the role of the car dealer, and whether the previous owner recovered VAT are all important factors to consider. Only taxable supplies are eligible for VAT recovery, and the rules for charging VAT and reclaiming VAT depend on the vehicle’s classification and use.
Record Keeping and VAT Claims
Good record keeping is the foundation of successful VAT claims on business vehicles. To support your claims, you must keep detailed mileage records showing the business mileage and private use for each vehicle. This includes keeping logs of business journeys, fuel purchases, and all vehicle expenses. Sales invoices and VAT invoices for vehicle purchases, leasing, repairs, and fuel should be kept safe and organised, as these documents are essential for proving your VAT claims if HMRC ever asks.
Detailed mileage records are especially important if your vehicles are used for both business and private purposes, as they help you accurately calculate the proportion of VAT you can reclaim. For pool cars and other business vehicles, maintaining clear records of business use versus private use ensures you stay compliant and claim the correct amount of VAT. By keeping thorough and accurate records, you’ll make the VAT claim process much smoother and reduce the risk of errors or penalties.
VAT Claim Process
The VAT claim process for business vehicles involves several important steps. First, your business must be VAT registered to reclaim VAT on business vehicles, fuel, and related expenses. Once registered, you’ll need to keep accurate records of all input tax (the VAT you pay on purchases) and output tax (the VAT you charge on sales). When it’s time to submit your VAT return, you’ll use these records to calculate how much VAT you can reclaim and how much you need to pay.
It’s important to follow the latest VAT notices and HMRC guidance to ensure you’re claiming VAT correctly on company cars, commercial vehicles, and other business vehicles. The process can be complex, especially when dealing with mixed-use vehicles or special cases like the sale of a company car, but understanding the rules around reclaiming VAT and recovering VAT will help you get it right. If you’re ever unsure, consulting a tax expert or accountant can help you navigate the process and make sure your business is making the most of its VAT entitlements.
