tax and VAT on business vehicle

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There are special rules for VAT on business vehicles – and the fuel used in them. You cannot normally reclaim the input tax you have to pay on a new car. However, VAT registered businesses can claim it back if they can genuinely show the car is used 100% for business – e.g. a pool car kept on site, for instance. However you must then charge output tax if the car is later sold.

VAT paid on commercial vehicles (vans, lorries or tractors, for example) can be reclaimed in full subject to the normal rules. If a company pays for both private and business fuel, a fixed VAT charge is applicable. This is known as the fuel scale charge and is based on the size of the vehicle. It means the business can reclaim VAT on both the business and private elements of fuel.

If the business does not pay for private mileage, a scale charge does not apply and VAT may be reclaimed on fuel bought for business. Of course you must keep a detailed record of business mileage. VAT may be reclaimed on any car leased for business purposes (this figure is 50% of the lease charge).

other taxes on business vehicles

Every vehicle is subject to vehicle excise duty unless it is over 30 years old. Apart from road tax, you have to keep the car road-worthy, have an annual MOT if the vehicle is more than three years old, pay for insurance and servicing, parking tickets, speeding fines, not to mention petrol. Some taxes relevant to business vehicles depend on a number of issues including the legal form your business and your employment status. Rates vary depending on the type of vehicle.

If you are self-employed you have two choices. Either claim the actual expenses of using a vehicle for business when working out your profits (plus you can claim capital allowances if you own the vehicle), or use the rates from the Approved Mileage Allowance Payments (AMAP) scheme to calculate your business expenses using a fixed rate for each business mile. Rates depend on the level of mileage. Remember that under this system you cannot claim for any interest you pay on a loan to buy the vehicle (or any capital allowances). All paperwork and adequate records must be kept. Some people prefer to charge the mileage allowance to expenses rather than keep a record of all motoring expenses and then working out the business-use proportion, but it depends how much you use the car for business.

If you are an employee – and you are if your business is a limited company - there are different rules. If the business offers a company car, where an employee also uses the vehicle for private use, then the employee is taxed on the car as it is a benefit. This is a percentage of the car’s list price, and will depend on the level of carbon dioxide emissions and type of fuel used. Energy-efficient cars pay less tax.

Fuel used for private use is also taxed. If the employee uses their own car for business use they can be reimbursed under the Approved Mileage Allowance Payments scheme at a set rate per business mile. The rate depends on the number of business miles, and can be made free of tax and National Insurance if the employee is paid no more than the maximum calculated using the appropriate rate. Employers have to pay Class 1A National Insurance on the taxable values of cars and fuel made available to employees for their private use. The rules are complex, so consult an accountant or check the position with HMRC.

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