Motor expenses - an unexpected VAT bonus
VAT rules for cars used in a business are notoriously strict. However, for some types of car-related expenditure they are surprisingly generous. What are they and how can your client take maximum advantage of them?
All or nothing Except in the rare situation that your client can prove to HMRC that a car is used 100% for a business, it will not permit them to reclaim any of the VAT paid on its purchase. Any private use whatsoever precludes them from claiming any VAT - it cannot be apportioned between business and private use as it can for other expenditure. The good news is that this block doesn't apply to motor running expenses. In fact, the VAT rules for these are the antithesis of those for car purchases.
Journey-related costs Before we look at motor running costs remember that the rules for these differ from journey-related expenses. The normal VAT rules apply to these. This means that VAT paid on expenses relating to a business journey, for example off-road parking charges, can be reclaimed in full. For some types of journey-related expenses you may need to apportion VAT between business and private use, as in the case of a petrol bill.
Motor running expenses When you get to considering the cost of repairing and maintaining your client's car the VAT rules become interesting, in a good way.
Tip - Even where there's significant private use of a car, HMRC allows you to reclaim 100% of the VAT paid on this sort of expenditure. This generosity isn't confined to cars owned by the business, it also applies to those personally owned if they are used for business journeys.
Example - Fran owns and runs a cleaning business and employs two staff. All three use their own cars to travel to and from clients, and for private journeys. Fran pays the servicing costs of each car, and in the case of her employees she deducts what she pays from the mileage allowance (net of the element relating to fuel) she pays them. Fran is entitled to reclaim all the VAT on her and her employees' car service bills. Fran's business also pays the bills for new tyres, cleaning and repair of her car, which means it can reclaim 100% of the VAT on these costs.
Tip - The VAT break can also be used by companies where they pay service etc. bills for directors, employees and, subject to conditions, even freelance contractors.
Tip - Although not vital for VAT claims, where possible your client should arrange for service etc. bills to be addressed to their business. Remember that for employees (including directors) income tax and NI charges will apply if the value of the service etc. bills for their cars exceed their entitlement to the mileage allowances (again, reduced to remove the cost of fuel element) they are paid.
How much is enough?
There's no minimum business use requirement to take advantage of this VAT break. In theory your client might only use their car for business 5% of the time, but they'll still be entitled to reclaim 100% of the VAT on service etc. costs paid by the business.