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How to Reclaim VAT on Cars

How to Reclaim VAT on Cars

Reclaiming VAT on cars has always been difficult. HMRC always argued that if a car was not “wholly and exclusively” for the business, VAT could not be reclaimed. In essence, if a company car was used to travel 1 non-business mile, a reclaim of VAT was not possible. Proving that a vehicle had not ever been used privately was difficult. HMRC has, understandably, never documented what evidence it would require in to allow such a reclaim. Whilst this still remains the case, a number of recent cases have set the roadmap to allow for VAT reclaims.

One issue these cases addressed was around the intent to use a company vehicle for personal journeys. It’s next to impossible to prove personal use didn’t/won’t happen. However, if the company takes the appropriate steps, it can show that it’s intent is that the car will only be used for business purposes. If it can do that, a reclaim of input VAT should be allowed. With £5,000 of VAT to reclaim on a £30,000 car, it’s easy to see why taxpayers are keen to reclaim and HMRC are intent on blocking them. So, what do you need to do to reclaim?

1.  Insure the car for business use only

If you only insure a vehicle for business use this is a pretty strong indicator that you only intend to use it for business. Private use would leave the company directly liable for any claim arising from a private journey. As such, it can be inferred the car is intended for business use only.

2. Instruct all potential users of the car that it is to be used for business purposes only

By informing all staff that the vehicle is for business use only it goes further to back up the intent of its use. Get employees to counter sign a declaration that they agree to the restriction of use of the vehicle.

3. Insert a stipulation in employment contracts

Further enforce point two by including a clause in the contract of employment that employees agree not to use company cars for private use. They should also agree to return pool cars to the business premises at night. In 2016, the first tier tribunal, in the case of Jane Barton, sided with the taxpayer in reclaiming VAT even though her business premises was at her home address. So even though the car was kept at her home, this also doubled as her business address an was deemed acceptable.

4. Get the paperwork right

As well as employee declarations and amendments to employment contract, a detailed mileage log is invaluable to a successful reclaim of VAT. Again, a clause could be inserted in the employment contract that employees agree to log all journeys in a mileage log. Also consider having the directors pass a board resolution restricting the use of the vehicle to business use only.

Summary

If the above points are followed, a reclaim of VAT should be allowed. It’s worth noting however, some taxpayers have won their case in the First Tier Tribunal without hitting all the above points. In 2016, Zone Contractors Ltd were allowed their reclaim of VAT even though there were no restriction to the insurance policy. There were also concerns over the credibility of the mileage logs. However, the legal and physical restrictions (stipulation in the employment contracts and requiring the vehicle to be stored at business premises overnight) were enough to side with the taxpayer.

Each case is very much decided on its own merits. However, if all the above steps are taken, there should be little or no room for HMRC to argue that the car is not intended for business purposes.

Did You Know You Can Make Over £37k A Year Without Paying Tax

Did you know you can make over £37k a year without paying tax?

Up until 5th April when the Government abolished the 10% tax credit on dividends in favour of a new £5,000 allowance, it was easy to earn £37,000 a year without paying tax. However, you typically needed to own your own (profitable) company. The mechanism in this instance was to take a salary equivalent to you personal allowance and then gross dividends equal to the rest of your basic rate band and you could come away with £37-38k and only pay a small amount of National Insurance on the lot. Now however, dividends in excess of £5,000 are to be taxed at 7.5% for basic rate tax payers.

However, it is still possible to make around £37,000 a year without incurring any tax at all.

I should state that while it is possible, it may not be entirely practical. But I think it’s worth looking at the multitude of tax allowances that have become available in recent years as the Government have gradually restructured the tax system.

In short, the reliefs available to everyone are:

  • Personal Allowance – £11,000
  • CGT Annual Exemption – £11,100
  • Dividend Allowance – £5,000
  • Savings Allowance – £1,000
  • Rent-A-Room Relief – £7,500
  • Trading Micro-Enterprise – £1,000 (from April 2017)
  • Property Micro-Enterprise – £1,000 (from April 2017)

On top of these, you also have an exemption from any interest earned in ISA’s plus tax relief for pension contributions.

The Usual Suspects

The main allowance that people will be familiar with is the Personal Allowance. In the current tax year this allows you to earn £11,000 before you pay tax (around £917/month or £212/week).

On top of that, everyone has an annual exemption for Capital Gains Tax. This comes in to effect if you sell shares, land, property (except you main residence) or other valuable items such as paintings. At the minute this allowance is £11,100. So you can make £11,100 profit on the sale of these items without having to pay any tax.

The “Makeover” Reliefs

A number of existing tax reliefs have been spruced up in recent years. The main one of interest to any small business owners is the £5,000 dividend allowance. Whilst not as generous in tax terms as its predecessor – the 10% tax credit – it’s still a valuable allowance. If you and your spouse are the only shareholders in your small company, that’s an extra £10k in to the household every year with no further tax cost.

Another allowances that has been modernised is the Rent-a-Room relief. For years this relief stood at £4,250, meaning you could rent out a furnished bedroom of your house for up to £4,250 a year and pay no tax. Now however, this relief has been raised to £7,500. As soon as this was announced, my first thought went straight to Air BNB. This platform has really grown in popularity in recent years and some people were doing very well out of this. However, one of the fears that people had was how this income left them in terms of their tax compliance. This increase should mean that the vast majority of users will fall below the limit and, as such, not fall foul of the legislation.

The Newcomers

Aside from the above allowances, which have either always been around or have just had a face lift, 3 new allowances have come in to effect recently.

For basic rate tax payers, there is now a £1,000 savings allowance – so the first £1,000 of bank interest (excluding interest on ISA’s which is still exempt) will be tax free. Those paying tax at the higher 40% rate still get a £500 allowance.

The two most progressive allowances to come from the recent budget make me very happy as they really aim to take a lot of burden off those earning small amounts from “side-projects”. There are two £1,000 allowances for micro enterprises – one for trading income and one for property income. These two allowances are due to come in to effect in April 2017 so are still subject to change.

Those likely to benefit from this will be those selling small amounts of products/services online or renting out sheds, storage units or driveways. But in reality, any trade with receipts of less than £1k qualify for the relief so musicians, market traders and artists could all benefit. If your total income is less that £1,000 you have nothing to declare. Above this limit and you can either deduct your expenses before calculating the tax or just deduct £1,000.

It should be noted that the Rent-A-Room relief and the £1,000 micro enterprise allowance can’t be added together for the same purpose. But they can be used separately. So if you are getting the use of the Rent-A-Room relief, you will need to rent out your driveway or storage unit to use the £1,000 micro enterprise property relief.

Conclusion

As previously stated, whilst it is possible to use all these reliefs together, it may not be particularly practical. To do so you would need to have quite a lot wealth to begin with. For example to earn £1,000 of interest in a single year would require around £40-50k in savings. But be aware of all of the above – particularly the micro-enterprise reliefs – and cherry pick those that apply to your circumstances. Tax alone on £37,000 of income would normally be over £5,000 so some real savings are available by using the above.

As always, speak to your accountant about how best to maximise your tax savings as the advice given will greatly depend on your own circumstances.