VAT Recovery on Cars and Motor Expenses – Part 2

In a previous posting ( https://way2vat.com/vat-recovery-on-cars-and-expenses/  ) we looked at the VAT recovery position of cars and what is considered a car.  In this post we will look at other motor related expenses and their VAT recovery. 

It is quite common for businesses to lease cars often also called contract hire.  Under most leases each monthly leasing charge is subject to VAT.  Readers will recall that normally there is a total block of VAT recovery on the purchase of most cars.  The position for leased cars is less harsh.   A business that leases a car that is also available for private use is entitled to recover 50% of the VAT incurred on the monthly leasing charge. The other 50% of the VAT incurred is blocked from VAT recovery – the UK tax authorities (HMRC) do not require business to keep detailed records. The 50% block applies to optional extra services and mileage charges.  

It is common for leasing companies to enter into a separate maintenance contract with customers.  One reason for this is that 50% block does not apply to the maintenance charges. HMRC has agreed a method with the leasing trade organisations to determine the level of the maintenance charges and if the maintenance charge is separately declared the VAT on such a charge can be recovered in full, subject to the business being able to recover VAT.   

If a business incurs repair costs for a car, it can recover the VAT incurred on the costs if it holds a proper VAT invoice. The VAT can be reclaimed even if the car is available partly for private use. If the car is only used for private purposes, the VAT on the repair costs is not recoverable. 

It should be noted that hire purchase and similar agreements are not treated for VAT purposes as leases, and therefore VAT recovery is blocked in full on these types of contracts. 

Short Term Hire 

If a business hires a self-drive car by concession if the self-drive hire is less than 10 days HMRC will allow the business to recover the VAT in full.  

Car Parking 

Car parking is often subject to VAT and if the car parking charge is incurred for a business purpose VAT recovery is available. No VAT is charged on parking meters found on streets. A good rule of thumb to determine whether VAT is charged is if a receipt issued has a VAT registration number.  If it does it is likely that the parking will be liable to VAT. 

Petrol and Fuel 

A business can recover the VAT on fuel if the car is used only for business purposes. Since most businesses allow employees to use their cars for both business and private purposes, VAT can be recovered as follows:

  1. only reclaim the VAT on fuel you use for business trips – a business will need to keep detailed mileage records; or                                                                                                                                             
  2. reclaim all the VAT and pay the right fuel scale charge for the vehicle. The VAT fuel scale charge allows a business to recover VAT on fuel, without having to keep detailed mileage records to work out how much fuel is used for private use. If a business uses the fuel scale charge, then it should be able to recover all of the VAT incurred on the fuel purchased but will need to account for output VAT based on the road fuel scale charge tables issued by HMRC.  The VAT which is payable is calculated by reference to the CO2 emissions.

 

In both cases, businesses will need to retain invoices for the purchase of fuel.