A legitimate VAT claim for the cost of private motoring

If you’re a director, business partner or self-employed as a sole trader, there’s a generous VAT break which, if you use your own car for business, could cut your running costs. How can you make it work for you?

Tax is taxing

Despite HMRC’s insistence that “Tax doesn’t have to be taxing”, it is. In fact it’s so downright complicated at times that mistakes are made which often result in there being more tax to pay. So it’s a nice surprise when the Taxman arrives on your doorstep to inspect your VAT records and leaves telling you that he actually owes you money.

Car confusion

Overall, our subscriber scored rather well with the VAT inspector on his understanding of the rules. But he came up short when it came to car expenses. These are particularly complicated and even though he knew the basics he thought he was for the high jump when the inspector told him that he had been doing it wrong.

Ownership not relevant

Our subscriber uses his own car on company business and so didn’t give VAT a second thought when it came to paying for servicing etc. But the VAT inspector told him that as his car was used for some business travel, even though this was just a few hundred miles per year, he can reclaim 100% of the VAT paid on the maintenance costs, even if the car doesn’t belong to the company.

Example. Jim is a director of Acom Ltd. He owns his own car in which he travels 1,500 miles on business each year. As this is a fairly small proportion of his overall mileage, he only asks the company to reimburse him for the fuel he uses. And, to be fair, it also arranges and pays for his servicing which typically costs about £500 plus VAT. The company is entitled to reclaim the VAT it pays on these costs. The same would apply to repairs or other maintenance costs the company paid for.

Trap. If the company had paid Jim an allowance amounting to more than the cost of the fuel he used for business, it wouldn’t be allowed to recover the VAT on the servicing costs.

Tip. The company should arrange and pay for servicing, repairs etc. directly with the garage. It’s important that the bill is in the company’s name when claiming VAT back. It also avoids a potential PAYE trap.

And it’s not just for companies

If you’re self-employed or in partnership, even if it’s just in your spare time, the VAT position on cars is even more generous. While you can only claim a deduction in your accounts for the business proportion of your motor running expenses, you’re allowed to claim back 100% of the VAT you’ve paid on them.

Example. If you used your car for business, say, just 5% of the time, you would only be allowed to deduct 5% of your motor running costs, insurance, tyres, servicing etc. in your business accounts. But the Taxman’s rules allow you to claim 100% of the VAT back. So if one year you paid £1,000 plus VAT on servicing, tyres etc., you can only put down £50 of this in your business accounts. But you could still claim all the VAT of £200 back. You’ll have actually made a profit from the Taxman!

If you need any more advice on VAT, please don't hesitate to get in touch with us!

A legitimate VAT claim for the cost of private motoring

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