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Q: My client is the sole shareholder / director of a VAT registered limited company making taxable supplies of business consultancy. My client lives in London but works regularly in Glasgow where some clients are based. Over the last year he has stayed in a hotel when away but is thinking now of buying a sizeable motorhome, through the company, for £50k plus £10k VAT. Although he may occasionally use the motorhome for a family trips, can the company claim the VAT back as input tax on its VAT return? Based on prior year hotel stays, he anticipates approximately 75% business and 25% private use.

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.

Disclaimer

These publications from Markel Tax were correct at the time of going to press and should be considered as principles-based guidance only. To check current validity, call the Markel Tax helpline. ICAEW (as distributor) disclaims all liability for any errors or omissions.

About Markel Tax

Markel Tax offers expert advice on UK tax and VAT via its helpline and provides monthly FAQs with questions and answers on common tax issues for businesses and practitioners.

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