HM Revenue & Customs (HMRC) have recently published a revised Notice 700/64 Motoring Expenses. Whilst there is little new in this notice, there are a few points which we think could be easily overlooked by VAT registered businesses. Some provide for VAT recovery opportunities whilst other points may need addressing to protect businesses from challenges by HMRC officers on future VAT visits.
Firstly, if you use a vehicle for business purposes, you can reclaim the VAT charged on repairs and maintenance as input tax as long as the business paid for the work. It does not matter if the vehicle is used for private motoring or if you have chosen not to reclaim VAT on road fuel.
If, however, you are a sole proprietor or partner and use a vehicle solely for your own private motoring you cannot reclaim the VAT on repairs etc. as input tax.
Ordinarily a business will be unable to recover input VAT on purchasing(100% input VAT restriction) or leasing(50% input VAT restriction) a vehicle where it is made available for private use by an employee. In the event, however, that input VAT has been recovered in full by the business and you provide the vehicle to an employee with a motor car and they pay nothing for the use of it, you must account for VAT on the cost of making the car available for their private use. This cost will usually include depreciation; repairs and other running costs; but not any VAT you have recovered as input tax.
Similiarly if there has been no input VAT restriction on the purchase or lease of a vehicle and you charge an employee for the private use of the car or other vehicle, VAT must be accounted for on this amount. Please note that there are special rules for the valuation of the charge for cars used by motor dealer staff.
Finally, if the business pays for road fuel there are four options available concerning the VAT incurred as follows
(a) claim all of the VAT because 100 per cent is used for business purpose; or
(b) claim all VAT charged and apply the fuel scale charge to account for private use; or
(c) use detailed mileage records to separate your business mileage from private mileage(and reclaim VAT on the business element); or
(d) claim no input tax.
As an alternative the business can pay a mileage allowance (which includes a fuel element) to employees for business trips made in their own cars. HMRC publish mileage rates which can be paid without the need for income tax becoming payable by the employee and rates which can be used as the fuel element on which input tax can be reclaimed by the business. You do need to ensure that a fuel VAT invoice is attached to the employees mileage claim where you claim input tax.
And finally, don’t forget if you have failed to account for VAT properly on these issues, HMRC may go back four years to collect underpaid VAT – but you can also go back four years where your business has underclaimed.
If you have any queries on these issues or would like to discuss the opportunity for making a VAT claim please contact us.