Claiming VAT back as input tax

A: Assuming the vehicle is not a “car” for VAT purposes (see VIT51200) it will not be caught by the car VAT recovery block so normal VAT recovery rules apply. HMRC would see this as a lifestyle type vehicle and therefore expect some consideration be given to the extent of business versus private-use of this asset. Given the client expects private use, he has a choice of:

a) Apportion the VAT incurred between taxable business and private use on a fair and reasonable basis at the outset per VIT25240. The company would only claim £6k VAT (75% of £8k) back when the it buys the vehicle. When the company later sells the vehicle, it only has to charge VAT on the business element (so say it is sold for £4k, the company must account for VAT on 75% of the £4k sales price, i.e. £3k + VAT, with the other £1k proceeds being disregarded for VAT purposes).
b) Claim 100% of the VAT incurred as being wholly for the purpose of the company’s (taxable) business activity (so £8k claimed). Then, assuming a 5 year economic life, whenever there was private use of the asset within that 5 year life, an amount of output tax would have to be accounted for on the deemed supply (at market value) of the use of the vehicle; this is called the “Lennartz Principle” (see VIT25540). If the vehicle was sold the company would also have to account for VAT on the full sales price.

Whichever route is used, HMRC would expect the business to keep records of how the split / values were determined in a fair & reasonable way, especially as it involves a Director; it might also be wise to keep mileage records or similar showing the actual use is not too out of kilter with the predicted 75/25 split.