Cars and the VAT Flat Rate Scheme

Normally, if you were to acquire the car under contract hire (effectively “rent”), as a VAT-registered business you could recover some VAT. The amount of VAT recoverable on the invoice is likely to be restricted to just 50% though.

However, as you use the Flat Rate Scheme, I’m afraid this isn’t possible. As you probably know, the Flat Rate Scheme has many advantages. But one of its draw-backs is that you can’t reclaim the VAT on your purchases, except for the VAT on certain capital expenditure costing £2,000 (including VAT) or more.

If you were to purchase the car under hire purchase or in cash, you’re also unlikely to be able to recover the VAT unless you can demonstrate that the car is only used for business purposes- and is not even available for private use. Private use includes commuting from home to work.

You may also be able to claim all the VAT on a new car if it’s mainly used:

• as a taxi
• for driving instruction "¨
• for self-drive hire

So whether you rent or acquire the car in some other way, it’s unlikely you’ll be able to recover the VAT; either because you are using the Flat Rate Scheme or simply because it is a car you’re buying.

An alternative to consider would be a van or “car-derived van”. If they meet certain conditions, they can offer a lot of advantages when it comes to tax. Running a van may not always be practical or suit the image of the business.

But if it is possible, it’s worth estimating the figures once you’ve found some cars or vans that you might be interested in. Your local TaxAssist Accountant would be happy to review this for you. 

Date published 2 Sep 2016

This article is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.