Understanding how to recover VAT on cars and other assets can be complex, especially when considering private use and different types of businesses. Here’s a breakdown of the current rules and practical advice for small businesses.
Key Points on Input Tax Recovery
1. General Rules
- Input tax recovery is straightforward if it relates wholly to taxable activity.
- However, recovery is not allowed for:
- Cars for private use
- Customer entertaining
- Building materials not ordinarily incorporated
2. Complications for Exempt Income
- Businesses with exempt income need to ascertain if the input tax incurred is directly taxable, directly exempt, or residual.
- Charities face additional challenges due to non-business activity, which doesn’t allow for input tax deduction.
Cars Available for Private Use
- Cars available for private use are blocked from input tax recovery.
- Misconceptions exist that electric cars are exempt from this rule; they are not.
- Pool cars can be exempt from blocking provisions if evidence shows they are not available for private use.
Other Assets Available for Private Use
Sole Traders/Partnerships
- When VAT is incurred on a business cost with private use, options include:
- Deducting the business proportion only
- Deducting input VAT on the full cost and accounting for output tax on private use each quarter (Lennartz method)
Example: A £3,000 plus VAT laptop used 40% for private purposes can recover £360 in the purchase quarter or use Lennartz for quarterly adjustments.
- Important Note: Lennartz cannot be used for property, ships, and aircraft.
Corporates
- Similar options as sole traders but option 2 (Lennartz) is more commonly used.
- New car dealers recover full VAT on new cars purchased for resale but must manage demo cars’ private use carefully to avoid self-supply charges after 12 months.
Commercial Vehicles vs Cars
- VAT rules on road vehicles other than cars (e.g., vans) allow for business proportion recovery or Lennartz adoption.
- Commercial vehicles with incidental private use: Generally viewed as de minimis, thus input tax is not restricted.
- Vehicles suitable for private use: E.g., motor caravans, motorcycles, double cab pickups need careful consideration for private use implications.
- Conversions: Converting commercial vehicles to cars for private use triggers self-supply output VAT charges, which are non-deductible.
- Payload: Vehicles with a payload of one tonne or more are not treated as cars. It’s crucial to know the payload to avoid converting a commercial vehicle into a car.
Conclusion
Understanding the nuances of VAT recovery on cars and other assets is crucial for small businesses to avoid pitfalls and ensure compliance. Keeping abreast of current rules and maintaining proper documentation can help manage these complexities effectively.
Contributed by Mark McLaughlin