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Andrew Needham of VAT Specialists Ltd looks at VAT recovery issues in respect of motor vehicles.

Introduction

The recovery of VAT on motoring expenses continues to cause confusion to businesses and advisers alike, so in this article I am taking a look at the different methods of recovering VAT on road fuel and the advantages of each, as well as on the purchase and leasing of cars. 

The basic systems for recovering VAT on motoring expenses are:

• claim all the VAT back on road fuel and pay the Motoring Scale Charge;
• keep a detailed mileage record and calculate the proportion of VAT relating to business mileage;
• pay a mileage allowance and keep the petrol receipts; or
• don’t claim back the VAT on road fuel.

So let’s have a look at how the different methods work.

VAT Scale Charge

If you reclaim VAT on road fuel for private motoring, HMRC will insist that you pay the Motoring Scale Charge. This charge is based on the CO₂ emissions of the car and not the actual amount of private usage. The mileage rates can be found in Notice 700/64.

The scale charge must be added to the output tax (box 1), on the VAT return. If the business has a second or more cars and private fuel is provided, even with low mileage, there is a second or subsequent, scale charge. The only way around this is to have no fuel provided for private motoring for the second car.

If a company car driver repays the business, in full, for the fuel that they use for private motoring, then no scale charges are due, but VAT will be due on the payments received.

On the plus side the VAT on all road fuel, both business and private can be reclaimed, and the system is simple to use. On the down side you have to have quite high mileages for it to be financially worthwhile.

Keep Mileage Records

If you do not want to use the Motoring Scale Charge because the Scale Charge is more than the VAT on the road fuel, you can record all of your mileage in a mileage log showing the business mileage and the total mileage.

So if you have done 5,000 miles in the quarter and 1,000 are business miles, then you can recover 20% of the VAT. The system is accurate but complicated.

Pay a Mileage Allowance

If you do not want to pay the Scale Charge and the mileage log is too much of an administrative burden, then you can pay a mileage allowance and claim back the VAT on the element relating to road fuel. The AA and RAC publish mileage rates that give the fuel costs per mile for the different engine sizes; these can also be obtained from the HMRC website. It normally works out at between 10 to 15 pence per mile depending on the engine size. You then apply the VAT fraction to that figure and claim it back as input tax. You do need to have expenses forms to back up the claims and you will need to obtain petrol receipts to support the claim. Any purchases of less than £250, including VAT only, require a less detailed tax invoice. Where possible this is the method I would recommend.

The only other alternative is not to claim back the VAT on any road fuel at all.

VAT and Car Leasing

If there is any private use of a car then the business can only recover 50% of the VAT on leasing charges. However, other charges, such as maintenance and road-side assistance, etc., are not covered by the 50% restriction and the VAT on these charges could still be recovered in full.

Remember that this does not apply to lease purchase: you cannot reclaim the VAT on lease purchase if there is any private use because it is always intended that you will be the owner of the car at the end of the contract.

Many companies undertake short term leasing contracts, e.g., they hire cars for their staff for specific purposes. If the hire is less than 5 days the VAT can be recovered in full, but if it is over 5 days the 50% restriction applies if there is any private use. In cases where the hire is more than 5 days, e.g., a week or fortnight, it is possible to negotiate an extension to the 5-day limit for recovering all of the input VAT on the hire charge with HMRC.

Early Lease Termination

Where a lease is terminated early, the leasing company can choose to treat both the termination payment and any rental rebate as either VATable or outside the scope of VAT. If the leasing company chooses to treat the charges as VATable it will normally set off the termination payment against any rebate and issue an invoice for the difference. If the termination payment exceeds the rebate the VAT is not subject to the 50% restriction and you can reclaim it in full. Where the rebate exceeds the termination payment you need only adjust 50% of the input VAT and can keep the rest.

VAT on Purchasing a Car

The basic position is that when a business purchases a car, or when it registers for VAT and has a car on hand as an asset, it can only recover the VAT if there is no private use at all. If there is any private use no VAT can be reclaimed. Even going from home to work counts as private use!

Unfortunately, it is not enough for a taxpayer simply not to use a car privately in order to get the VAT back. The law states that the input VAT is blocked wherever a car is available for private use, regardless of whether or not the car is then actually put to such use.

In some cases it is fairly clear cut, for example companies buying cars to lease on to customers, taxi firms, car dealers and pool cars. These situations do not cover most businesses however.

There is one way to show HMRC that you intend to use the car exclusively for business use that the Tribunal has accepted, and even the VATman’s own internal guidance has conceded (Volume V1-13, Chapter 2A, Section 11B, paragraph 11.2(a)). This can be done by obtaining business use only insurance. This was accepted by a VAT Tribunal (Thompson, 14777) and has been confirmed on several occasions since then. The only problem is that many insurance companies do not provide business use only insurance policies!

Following the 2002 Court of Appeal decision in Upton t/a ‘Fagomatic’ [2002] BVC 451, it was difficult to see how anyone would ever be able to deduct VAT on the purchase of a car, even where the vehicle was never put to private use. The ‘Fagomatic’ decision had seemingly given HMRC an unassailable position based on the ‘available for private use’ test that had ultimately decided the case in their favour.

It mattered not whether the car was actually used privately, it merely had to be ‘available for private use’, evidenced by an insurance policy that allowed social and domestic use.

In 2006, however, there were three cases in quick succession that were decided in favour of the taxpayer. In late February, there was the Tribunal decision in Peter Jackson (Jewellers) Ltd (VTD 19,474). In early March, came the Court of Appeal case in Elm Milk Ltd [2006] BVC 296, and this was followed in May by the Tribunal decision in Philip Shaw (VTD 19,594).

In the Shaw case the taxpayer bought two BMW X5 vehicles together, one for use in his farm business, the other for use privately. HMRC argued the case based on the social and domestic cover on the insurance policy, but Mr Shaw rebutted this by showing how the insurance policy for his combine harvester had ‘social, domestic and pleasure’ cover too! He added that the premiums for both the X5s and the harvester were lower as a result.

The interpretation of the courts now seems to be based on ‘intention’ rather than ‘availability’, and in each of the three cases, the intention was evidenced in a different form; one written, one verbal, and one self-evidenced by the purchase of an identical vehicle.

A four-seat pick-up with a load capacity of more than 1 tonne is seen as a commercial vehicle, rather than a car, and the VAT on its purchase can be recovered providing there is some business use or it is a business asset.

Claiming VAT on Servicing and Repairs

There is no private use apportionment required for servicing and repairs. The restrictions on the purchase and lease of the car effectively cover the private use. Anything after that relating to repair and maintenance is eligible for VAT recovery.

The rules state that you are entitled to full VAT recovery on car running costs as long as the car is used for business purposes at least “some of the time” and the business pays for the work. So even if the car does only a few business miles in the year and the rest of the time is used personally, you still get full VAT recovery. However, if you pay a mileage allowance and that covers more than fuel costs this does not apply.

Interestingly this also applies to cars which don’t belong to the business. So if your employees use their cars for business trips and you pick up the servicing costs of their cars, you do get full input tax relief even though the car is not yours.

Similar rules apply to accessories installed in cars after delivery. You may later decide that you want a mobile phone hands-free kit. You get all the VAT back as long as you use it for some business calls. The fact that it is used for private calls most of the time is not an issue. Likewise the tow bar that you want for towing the caravan around at weekends can come VAT-free as long as there is a business use as well. Is there a trailer that you might need to tow occasionally to deliver goods or transport demonstration equipment to shows or sites?

Claiming VAT on Number Plates

In a recent VAT Tribunal case Mr Hooper incurred VAT of £256 in purchasing a car registration plate from the DVLA. The registration plate was “HO o2 per” and Mr Hooper said it was to publicise his restaurant, which, despite being called the Windmill, was known locally as “Hooper’s”. This was quite strange as he was in the process of selling the business at the time.

However, the tribunal believed Mr Hooper’s evidence and held that the expenditure was incurred for the purpose of the business and the appeal was allowed (19276 Colin Hooper).

This is one in a long line of cases in which business proprietors have purchased personalised number plates and claimed the VAT back. If you are going to be successful you will have to show that there is a genuine business purpose. The most obvious of these is advertising so it should refer to the business name or activity, rather than the proprietors name as in the rather lucky case above. It should also be shown as an asset of the business rather than being owned personally.

If you have not claimed all of the VAT back that you are entitled to you can go back up to four years and reclaim it, all you need are the invoices to show how much you can reclaim. If the amount of VAT is more than £10,000 you cannot claim it back on your VAT return but instead you must write to HMRC with the details and they will pay you separately.