VAT Archives - Accountants in Huddersfield

If your business is VAT registered and is not using the flat rate scheme, you may be eligible to recover all of the input VAT on vehicle maintenance and repair costs provided that the vehicle is used some of the time for business journeys. This is true even if the vehicle is also used for personal use.

For self employed people or partnerships, to recover VAT on vehicle maintenance, you just need to be able to evidence business use. This is usually easy if it’s a van or commercial vehicle, but for domestic cars, you will need to have some form of mileage log detailing business journeys.

For limited companies, where the vehicle is owned or leased by the company, any repair costs should be paid for by the company directly and VAT recovered as normal through your accounts.

But where the vehicle is not owned or leased by your limited company, the rules are different and there are a number of conditions that must be met in order to recover VAT on motor repairs:

The invoice must be made out to your company and the company must pay the invoice to the supplier directly.
The vehicle must be used for business purposes at least some of the time, evidenced by business mileage claims perhaps.
The employee must make good the payment to the company of the GROSS amount to avoid a P11d taxable benefit charge on the amount and Class 1A NICs.

If you fail to follow all of the above, there are severe penalties for failing to disclose this and for failing to submit P11d’s.

This may therefore be a bit of a hassle for only a small gain if your motor repairs are small, but it could be worth considering if you incur a large repair bill at some point.

Example

Here is an example of how this works in practice for a limited company where the vehicle is not owned by the company and instead, the company pays the approved 45p per mile for business journeys to the employee/director:

If your company pays £500 plus VAT from the company bank account for a repair, the entries in your accounts would be as follows:

Payment of £500 plus input VAT of £100 that will be reclaimed on the VAT return. Allocate this payment to travel and subsistence or motoring (use same code as mileage payments are allocated to).
The director then repays £600 into the company bank account and the transaction is recorded as a bank receipt of £600 (NO VAT – or Out of Scope) from the director/employee which should also be allocated to the same code i.e. travel or motoring. You may need to explain it as a Refund in some accounting packages.

The net effect is that the company will recover £100 of input VAT, but will not receive any corporation tax relief for the payment because it is not allowable. It will in fact pay tax on the extra £200 received from the director, but overall the company has gained because the VAT reclaimed is more than the additional corporation tax charge.

Trivial Benefits

Many business owners are now making use of the trivial benefits exemption which was introduced a number of years back. Trivial benefits are an allowable business cost and you don’t have to pay tax or National Insurance on a benefit for an employee/director if all of the following apply:

it cost you £50 or less to provide (per occurrence)
it isn’t cash or a cash voucher
it isn’t a reward for their work or performance
it isn’t in the terms of their contract

However, directors of a company run by 5 or fewer shareholders can’t receive trivial benefits worth more than £300 per person in a tax year.

Examples of trivial benefits may include a birthday or Christmas gift, a bunch of flowers for a bereavement, or a staff meal out etc. Trivial benefits are in addition to the annual staff party exemption of £150 per head.

But what is the VAT position?

Gifts of goods

Input VAT incurred on the purchase of business gifts can be recovered, but you may also have to account for the output VAT on the cost i.e. effectively pay back the VAT to HMRC, unless the total cost of all the gifts given to the same person does not exceed £50, excluding VAT, in any 12-month period.

In simple terms, to avoid this problem, this means that you should not reclaim input VAT on gifts, where the total of all gifts to the same person in a 12-month period will exceed £50, excluding VAT. This rule applies to gifts to all persons, including directors, employees, customers and suppliers etc.

Staff parties and outings

Where an employer provides entertainment for the benefit of employees, for example to maintain staff morale, it does so wholly for business purposes. Therefore, the input VAT paid on costs such as staff parties, team building exercises, staff outings and similar events is recoverable.

However, there are two exceptions to the general rule. These are where:

entertainment is provided ONLY to directors, partners or sole proprietors of the business, or
employees act as hosts to non-employees.

Therefore, unless other employees, other than the owners or directors of the business, attend the event, you cannot reclaim the input VAT incurred. But if other employees attend, all the input VAT is recoverable.

Strictly speaking therefore, if you are a one-person business or a company consisting only of directors, you should not reclaim the input VAT on staff entertaining.

Entertaining others

Entertaining non-employees is not a tax deductible business expense, although it is perfectly acceptable for the business to pay for the cost; it just won’t save you any tax. Therefore, neither can you reclaim input VAT on non-staff entertaining.

If there is a mixture of staff and non-staff at an event, you can apportion the input VAT and reclaim the appropriate proportion. However, if the attendance of non-staff is for the sole purpose of entertaining a non-employee, the input VAT is not recoverable at all.

Further information

More information about theses topics can be found here:

Business promotions (VAT Notice 700/7)

Business entertainment (VAT Notice 700/65)

Category: VAT

Recovering VAT on motoring repairs

VAT on gifts, benefits and entertaining