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From the introduction of VAT in 1973, there has been a specific rule, to prevent the recovery of input VAT on the purchase of a new car. This applies whether the car is bought for cash, with a trade in, on hire purchase, or on lease purchase.
There is a different rule for leased cars. Bearing in mind that a home to work journey counts as private use, it is very unusual for a leased car to have no private use.
If a leased car has no private use, input VAT can be recovered as invoiced (unless the partial exemption rules apply). If however there is any private use, only 50% of the VAT shown on the invoice can be recovered. There is generally no reference to this rule on the invoice, and most computer accounts packages make no provision for it.
This restriction only applies to the basic rental element of the agreement. Any input VAT incurred on a separately identified maintenance charge on the rental invoice, as any other repairs, can be recovered in full.
VAT inspectors are well trained to find this error, and charge penalties and interest for input tax overclaimed.
Self-drive hire cars also suffer from the 50% recovery restriction unless the period of hire is less than 10 days (5 days before July 2002). The 10 day limit might be extended where it can be shown that the self-drive hire is no more than a stop-gap replacement for a lease vehicle which is off the road.
See also VAT Planning, VAT Flat Rate Scheme, VAT Returns, VAT Bad Debt Relief, VAT Capital Goods Scheme, VAT Car Fuel Scale Charge, VAT Partial Exemption, VAT Registration Numbers, VAT Retail Schemes
Reminder - disclaimer applies. Please feedback your comments. This page was last modified 18 August 2002.