We have previously talked about the tax benefits and implications of business car and van leasing. Today, we’d like to talk a bit more about reclaiming VAT on leased vehicles.
When can you claim VAT back? Are the VAT rules the same for leased cars as they are for leased vans?
VAT recovery on vehicle lease payments
If you have a VAT-registered business and drive a vehicle for work, you must know the rules for VAT recovery on cars and vans. A vehicle’s classification is essential when determining which VAT rules apply to that vehicle. Therefore, it’s always wise to check with HMRC for the latest list of vehicles for which different procedures can apply.
Reclaiming VAT on business van lease
There are no restrictions on claiming back VAT paid on vans. They are considered commercial vehicles where any private use will be minimal. Therefore, vans and other commercial vehicles are eligible for 100% input VAT recovery whether you bought the vehicle outright, by hire purchase, or on a lease-purchase agreement. There is also no restriction on reclaiming VAT on a leased business van. You can reclaim 100% VAT on the initial rental, monthly rentals, and even maintenance charges. What’s more, the excess mileage charge is considered a service charge for tax purposes. Therefore, you can claim the whole VAT element of the extra mileage charges back.
Can you reclaim VAT on business car lease?
To reclaim input VAT on the purchase cost of a new vehicle, we need to substantiate that the vehicle is for business use. It is probably one of the most challenging hurdles to overcome when purchasing a business car. Regardless of how you buy the vehicle (outright purchase, hire purchase, or lease purchase), you will be blocked from recovering the VAT in question unless:
- The car is used for business and business only purposes and is not subject to a previous claim that HMRC has blocked
- The car is used exclusively for taxi services, self-drive hire (typically less than 30 days), or driving instruction. Again, there must not have been a previous claim that HMRC rejected. You also cannot claim on these grounds if no consideration is received for leasing the vehicle
- The car is part of the stock of a motor manufacturer or motor dealer
- You are adapting the car for use by a disabled person. Check HMRC guidance for where these rules apply
Reclaiming vehicle VAT is a bit easier when you lease your business car instead. Still, you won’t be able to claim 100%. So how much VAT can you reclaim on a leased business car? HMRC assumes that the vehicle can serve both business and personal use; hence the allowance for VAT recovery on the finance element of the agreement is 50%.
For business cars used by multiple employees and left on business premises overnight and at the weekends, you’re allowed to claim full VAT on the finance element of the lease agreement. However, you need to have proof that your car is in that category. Examples of this are (‘pool cars’), taxi cabs, driving school cars or self-drive hire vehicles. HMRC is very sensitive about it, so you shouldn’t try to bend these rules.
The 50% input tax block applies to the lease element of the contract only. However, if you choose a maintained agreement, the maintenance element is considered a business expense allowing you to claim 100% of the VAT back. Just make sure that the maintenance charge is listed separately on the rental invoice!
How can you prove that the car is being used for business only?
The only way to demonstrate exclusive business use of a car is to prohibit its private use. How? You can do that by:
- Keeping the vehicle on business premises when unused during the day and outside business opening hours (including at night) with the keys locked (in a safe)
- Taking a car insurance policy for business use only
- Signing a car use agreement between yourself and your employee/s
- Installing a car tracker (however, this will only provide evidence of trips, not the fact that private use was impossible)