HMRC rules state that you cannot claim VAT paid on the purchase of a car if there is any private use at all, this even means when commuting to and from your place of work. There is of course the exception on cars used as taxis or for a driving school, you will still need to account for the VAT on the private use though. The rules do not apply to leased and since June 2019, purchases using personal contract purchases (PCPs).
The 50/50 rule
When you lease or buy a car using a qualifying PCP with the intention that the vehicle will be used by you or an employee, you can reclaim 50% of the VAT charges on the lease payments.
The amount of private use does not affect the amount of VAT you can reclaim as long as there is some business use.
Which is best – lease or purchase?
You will hear some leasing companies say “If it appreciates, buy it and if it depreciates, lease it” and that is certainly true when it comes to the VAT rules.
You need to determine if a contract is the type where you are entitled to reclaim the VAT and the easiest way of doing that is to closely look at the invoices/requests for payment that you receive. Normally each payment you make includes VAT and you can reclaim 50%.
If you’re unsure of the VAT status, phone the finance company and ask.
The paperwork can be misleading
You will often receive a VAT invoice annually in advance showing the instalments due for the next 12 months, they then might send payment receipts which don’t show the VAT. Use the VAT invoice to ensure that you’re claiming as you should be, or you could be missing out.
What about the extras?
The 50% rule does not apply to maintenance charges included in the lease or PCP, but they must be shown separately on the VAT invoice.
If in doubt, contact your accountant, they’re there to guide and advise you.
Alternatively, CONTACT US and we’d be happy to talk you through it.