With a few exceptions, reclaiming VAT paid on the purchase of a car is notoriously difficult. By comparison though, the VAT position for leasing and similar contracts is more relaxed.
Nicola Roby, Director at CHW explains exactly what you are entitled to reclaim?
HMRC rigorously polices the rule that the VAT paid on the purchase of a car cannot be reclaimed if there’s any private use at all. Cars used as taxis or as driving school vehicles are exceptions, although you may need to account for VAT for any private use.
However, the so-called VAT block on cars doesn’t apply to leased cars and, since June 2019, purchases on similar terms using personal contract purchases (PCPs).
The 50/50 rule
Where you lease or buy a car using a qualifying PCP, with the intention that it will be and is used by you or an employee of your business, you can reclaim 50% of the VAT charged on the lease payments.
The percentage you can reclaim is not affected by the amount of private use of the car. As long as there is some business use, 50% of the VAT charged by the leasing company can be reclaimed.
Lease or purchase?
It can be difficult (especially since the changes made in June 2019) to determine whether a contract is of the type which will entitle you to reclaim the VAT. The easiest way to check is to look at the invoices/requests for payment you receive from the finance company. As a rule of thumb, if the payments you make include an amount for VAT you can reclaim 50%. If it doesn’t, you might need to look more closely at the paperwork. If you’re still unsure of the VAT status, phone the finance (leasing) company and ask for clarification.
Don’t be misled by paperwork
Finance companies often issue a VAT invoice once a year in advance and show all instalments due over that period. In the interim they might send you requests for payment or payment receipts which don’t show VAT. You might, therefore, assume that you haven’t been charged VAT and as a result not claim what you’re entitled to. Therefore, ensure you obtain a VAT invoice for your payments at least once a year.
VAT on extras – claiming more than 50%
You could be entitled to claim more than 50% of the VAT charged for additional costs included in your lease or PCP payments.
The 50% rule doesn’t apply to maintenance charges included in a lease or PCP that cover servicing and wear and tear costs if they are shown separately on the invoice/demand for payment. An HMRC concession means that you’re entitled to reclaim 100% of VAT paid on separately-charged amounts for maintenance/services etc. This applies even there is private use of the car by you, your family or an employee.
You can also reclaim 100% of the VAT you pay where your business arranges and pays for the cost of the servicing, etc. Again, this isn’t affected by any private use of the car.
You can reclaim 50% of the VAT charged on lease rental payments regardless of the level of private use. If the leasing company charges you separately for maintenance you can reclaim 100% of the VAT in respect of this. The amount you can reclaim in both situations is not affected by private use of the car. This can make leasing an attractive alternative to purchasing for some. For more advice contact us.
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