VAT on company car on finance

A client has bought a company car and uses it 100% for business use. How does the company claim VAT?

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A client has bought a company car with 100% business use. We are now preparing his first VAT return. 

Cost of car: £23,983.33 + £4,796.67 vat = £28,780

Less deposit £3,500

HP agreement: £25,280 + £5,837.88 interest

Paid as: £398.81 x 48 months + Optional purchase payment £11,975

Car must be returned after the term or option to buy.

Firstly how do I account for this in the accounts? An asset? (Dr asset, Cr HP loan), then claim interest through P&L as and when it is paid?

Secondly, can 100% of the VAT be claimed on the monthly payments as it is used 100% for business purposes? 

Replies (18)

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By Wanderer
28th Apr 2022 10:54

Without further facts unlikely any VAT is claimable at all.

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VAT
By Jason Croke
28th Apr 2022 11:17

There is a specific input tax block/no input tax recovery on cars purchased by a business.

https://www.gov.uk/hmrc-internal-manuals/vat-input-tax/vit52100

You say the car is used 100% for business purpose. The legislation says the car must be used only for a business purpose AND not made available for personal use. It is this second condition that is the difficult one to pass.

So what physical and contractual restrictions are in place to stop an employee from taking the car home at night or nipping to Asda at lunchtime for a sandwich?

It's not impossible, but reclaiming VAT on a car will be entirely down to the exact circumstances of the business and the way the vehicle is used....if it is left at the office overnight and the keys locked away with strict signed in/out approach that might work, also, as more people work from home, the mere fact the car sits on the driveway makes the car "available" for private use, so a business that reclaimed VAT on a car previously on basis it was only ever kept at the compound/office may now be in trouble if that car is now at home 5 days a week post lockdown/work from home world we now live in.

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By David Ex
28th Apr 2022 10:57

SH Chartered wrote:
Firstly how do I account for this in the accounts?

How would you normally account for an acquisition on HP?

If you’re struggling with this (and the 100% business use point), might be better to pass the client to someone else.

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Replying to David Ex:
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By paul.benny
28th Apr 2022 11:24

+1

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Replying to David Ex:
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By Leywood
04th May 2022 13:14

David Ex wrote:

SH Chartered wrote: Firstly how do I account for this in the accounts?

How would you normally account for an acquisition on HP?

If you’re struggling with this (and the 100% business use point), might be better to pass the client to someone else.

Should pass it on.

Chartered.

Basic stuff.

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By The Dullard
28th Apr 2022 11:11

"Never use a second-hand accountant." - Reggie Kray.

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By paul.benny
28th Apr 2022 11:23

There is a case reported on here of a company that did succeed in demonstrating that the cars were indeed 100% business use and were not made available for private use. (I'll let you google it). It illustrates the high bar to input tax recovery.

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By I'msorryIhaven'taclue
28th Apr 2022 12:01

That's a sizeable optional purchase payment at the end. Are you certain this is a hire purchase agreement and not a finance lease?

If a finance lease then you may be eligible to reclaim 50% VAT element of payments.*
There's some detailed background at:
https://www.accountingweb.co.uk/community/blogs/leshoward/working-out-va...
Interesting distinction between the VAT treatment of supply of services and supply of goods.

*I know, I know... in your original post you stated 100% business use. But Jason (Croke) has identified above in his post regarding (100%) "qualifying cars" how a car may just be regarded as available for private use (and, if a leaser, thus perhaps qualify for a 50% VAT element of lease payments reclaim).

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Replying to I'msorryIhaven'taclue:
VAT
By Jason Croke
28th Apr 2022 12:09

Indeed, if it is lease only with no ownership, then 50% input tax is reclaimable on the rental/lease costs regardless of whether used for private or personal purposes.

Whether or not it is a lease or a purchase will depend on the wording of the agreement, HMRC view of the matter here https://www.gov.uk/government/publications/revenue-and-customs-brief-1-2...

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Replying to Jason Croke:
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By I'msorryIhaven'taclue
28th Apr 2022 13:47

Jason Croke wrote:

Indeed, if it is lease only with no ownership, then 50% input tax is reclaimable on the rental/lease costs regardless of whether used for private or personal purposes.

Thanks Jason, that's interesting. I hadn't realised that zero private use still allows such a 50% claim. There again, I cannot recall ever having had a case of a car either not being used for some private use or, as you have highlighted, not being available for private use.

I gather the key condition is that it is driven for some business use, no matter how little. Looks like I've had the wrong end of the stick with some p.u.

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By YENTL
04th May 2022 13:10

You would need to provide evidence of 100% business use.
The car would have to be insured for BUSINESS USE ONLY. IE no insurance for private use at all. (This probably includes not using the vehicle between home and place of business). It should be parked at business premises in the evening. ETC ETC ETC
So unlikely to be very practical
HJP

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Replying to YENTL:
By JCresswellTax
04th May 2022 13:52

Harry James Potter?

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Replying to YENTL:
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By Wanderer
04th May 2022 17:56

YENTL wrote:

The car would have to be insured for BUSINESS USE ONLY. IE no insurance for private use at all. (This probably includes not using the vehicle between home and place of business).

Think that "requirement" was kicked into touch a couple of years ago by a tribunal decision.
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Routemaster image
By tom123
04th May 2022 15:27

Do such 'only business use' policies exist?
Would you be wise to take one?
Not sure I would recommend that,.

What if your vehicle is, erroneously, used for non business, and then in an accident.
The company will be the 'non insured' person here, potentially opened up to multi £m claims etc.

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Replying to tom123:
All Paul Accountants in Leeds
By paulinleeds
05th May 2022 00:27

I'm reliably informed that ALL car insurance policies include SDP (Social, Domestic & Pleasure) use and then you add extra cover e.g. Class 1 business use to travel to clients, mainly business use eg hire, taxi etc.

Despite trying to find policies with no SDP, I've never found a client that has found one.

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Replying to paulinleeds:
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By DKB-Sheffield
05th May 2022 00:54

Motor trade policies - by default - are generally non-SDP. SDP is an addition on many of those policies. It is therefore possible to have a named driver, on a MT policy, driving for that MT business, in a company vehicle, with extensions to cover associated business use, without any SDP cover.

I have a couple of clients who have policies set up, and structured exactly as above (part time motor trade - testing, servicing or repairs & part time construction or similar - with the appropriate extension).

Admittedly this is not available to all and is now severely restricted to those in the motor trade (they were less restrictive/ 'picky' in the past).

The problem is with such policies, even though the vehicle is not insured for SDP, it does not prevent the vehicle from being available, or from being used as such. Having previously questionned a broker on the cover, were a vehicle to be taken to a director's home address overnight, they confirmed the vehicle would be covered (journey and in situ) as they had the home address listed as an additional 'business premises'! Even then, as the vehicle is insured (by some'one'), a fully comp driver could legally drive it on a third party basis (assuming relevant personal cover exists) with consent of the owner (being the limited company owned and managed by the potential driver).

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By paul.benny
04th May 2022 20:54

Some useful discussion but the OP is clearly too busy to participate.

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By jvenegas16
04th May 2022 21:42

Is it an HP or a lease contract with an option to buy?
That will give you a different answer on the VAT element.
That will also answer your question on the treatment as an asset or not.
However, as a matter of general rule, VAT on cars are blocked unless it is a company car. For that certain criteria need to be met and, if challenged, HMRC can be satisfied on the approach taken.

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