Reclaiming VAT on company cars

Company Car

A friend told you that HMRC allowed him to reclaim VAT on his new car because it’s used wholly for business travel. Your company owns a car that’s used almost entirely for work; does this mean you can reclaim most of the VAT?

VAT block

As you probably know VAT rules block businesses from reclaiming the VAT paid on the purchase of cars except where they are used 100% for business. The trouble is, save for where you deal in cars or run a taxi firm, HMRC is notoriously difficult to persuade that a car isn’t put to some private use. However, you stand a better chance where the car is a pool vehicle.
The VAT block doesn’t apply to vans which are used for private or other non-business journeys. You can reclaim VAT paid on the purchase of these in proportion to their business use.

Pool cars

A pool car for VAT purposes is one that’s:

  • normally kept at the business premises when not in use
  • not allocated to a particular employee or director; and
  • not kept at or near their home.

While HMRC applies these conditions strictly, it will allow you a little leeway.

Private journeys

HMRC’s in-house guidance says that certain private use of a pool car won’t jeopardise your right to reclaim VAT. Specifically, this applies where:

  • there’s incidental private use of a car. For example, if while on a bona fide business journey the driver takes a diversion to a nearby restaurant to have lunch
  • occasionally an employee or director takes the car home at night because of an early start to a business journey the next day. HMRC doesn’t say how often occasional is or what counts as an early start, it’s a matter of whether it seems reasonable to you.

The rules in practice

Like many tax rules you might wonder how they can be enforced. After all, HMRC is in a tricky position with pool cars; to prove beyond doubt there has been private use it would need to be around when it happened. However, the courts and tribunals have usually come to its aid by taking the line that unless a business has taken steps to prevent it, the assumption is that on balance private use is likely to have occurred.
During a VAT inspection, unless the HMRC officer is sure that a pool car meets the conditions he will demand repayment of any VAT you’ve reclaimed and leave it to you to prove him wrong. That could mean a costly tribunal hearing.
Have a written company policy prohibiting private use of a pool car, apart from incidental or necessary occasional use, for all workers. That includes directors and contractors as well as your regular employees.
Keep a record for every mile travelled in the car, who used it and where they went. Check frequently that it ties up with what shows on the car’s odometer. Don’t forget to keep a note of the mileage already travelled when you bought the car, otherwise you’ll have a gap in your records.