Blocked input tax – part one
VAT on business expenses (input tax) is not always recoverable. In general you can only recover input tax on goods or services to be used in the course or furtherance of your business. This means that anything not used wholly for business purposes will have the recovery of the input tax blocked in whole or in part.
Although not the topic of this note you should also be aware that input tax that is attributable to the making of exempt supplies is not, in general, recoverable. The rules on Partial Exemption give more details on this and will the subject of future blog articles.
The rest of this article looks at the following areas:
Cars
Although the recovery of VAT on cars bought by a business has always been blocked, businesses still include the VAT on the purchase of cars in their claims. And are still surprised when HMRC discover the error and raise an assessment. Having said that some businesses, such as car dealers, taxi firms, driving schools, are allowed to recover the VAT on the purchase of a car. But let’s have a closer look at the rules as they are today.
Purchase of a car
Except where a car is to be used wholly for business, i.e. with no unpaid or paid at below market rates private use, input tax cannot be recovered on a car bought by a business. There is plenty of case law that supports HMRC’s approach to this. So if you’ve bought a car for your business and recovered the VAT on it, pay it back to HMRC before they discover your error.
Hire or lease of a car
Fifty per cent of the input tax on the hire or leasing charge is recoverable. This does not cover hire purchase or lease purchase agreements which are treated as set out under ‘Purchase of a car’ above.
The 50% restriction only applies to the lease or hire charge. There is no restriction of input tax recovery for the maintenance contract element of a lease or hire agreement.
A self-drive hire car will also suffer a 50% restriction where the car is a replacement for a company car. However, where the self-drive hire car is not a replacement and is hire for no more than 10 days the 50% restriction does not apply provided the car is used for business purposes.
The other three items in this topic will be covered in part two.
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