Can you reclaim the VAT on a new car?

I was ‘talking’ via a social networking website with a friend recently and the conversation turned to business. May friend asked, “Might I trouble you with a swift VAT query?” and continued “I’m about to buy a car through the company, to use up some excess cash and reduce my Corporation Tax bill, and I was vaguely wondering if there were any wrinkles that would allow me to claim some or all of the VAT back? I can designate it 100% business use and keep full mileage logs if that will help. Any ideas?”

Here’s my response:

“The only way to get any VAT back is, unless you operate a car dealership or a taxi company, to designate it wholly business and have it insured wholly for business – no social domestic or pleasure use. It would also help if it was kept at business premises that are not also your home.

“Really the best way to save VAT on a company car is to lease it – avoiding any suggestion that you might be buying it at the end of the lease. This way you’ll get back 50% of the VAT on the lease payments.

“If you have to buy it outright to eat up all that profit you have, the best you can do is to make sure that all the expenses for it go through the company and you recover the VAT on them.

“Fuel is another issue and it is worth looking at whether the application of a Fuel Scale charge might be beneficial. You claim back the VAT on all your motoring, and pay a fixed amount to HMRC on each VAT return to ‘repay’ the VAT on private motoring. If you do a lot of private motoring, and not much business motoring this could be beneficial.

“These ideas fall flat on their face if you use the Flat Rate Scheme.

“If you have any more questions, just ask!”

And he did!

“A very comprehensive response, thank you.

“OK, one last question, if I may – if I were to claim the VAT back, and a subsequent inspection reversed that, would those nice men with the rubber gloves just ask for the VAT money, or are there additional penalties levied on top?”

This is an important point to which I replied:

“If you claimed back the VAT by mistake and HMRC discover that over claim you will have to pay interest on the amount repaid and might face a penalty of up to 100% of the VAT involved.

My advice is to get it right – even if it hurts a bit – that will be less painful than a penalty later.”

He replied: “OK, sound advice, thanks – given the rather obvious chance of it going against me, I wasn’t planning on claiming anything back if there was even a small penalty. 100% of the VAT involved isn’t small 🙂

Perhaps I’ll just have to buy a company bike as well, then.…”

Now there’s a topic for another post.

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