CORONAVIRUS - VAT - 07.07.2020

VAT trap for private use of company vehicles

In the last few months there’s been little work for two of your employees but they’ve continued to have use of their company vans, including for personal journeys. Does this affect what you need to report on your next VAT return?

Private use and tax

The income tax and NI consequences where you allow an employee or director private use of a company asset, e.g. a van, are fairly common knowledge. By comparison, the VAT consequences are far less well known and can vary considerably depending on the circumstances.

At time of purchase

If your business buys an asset and it’s known at the time that there will be private use, a corresponding adjustment to the VAT account is required. This must be made in one of two ways: by reducing the amount of VAT (input tax) you reclaim by the estimated private use; or by reclaiming all the input tax and accounting to HMRC for VAT on the private use according to a special formula. The position is different if, at the time of purchase, no (or negligible) private use was expected .

For detailed commentary on accounting for VAT on private use, visit http://tipsandadvice-tax.co.uk/download (TX 20.20.07).

Tip. While strictly the rules always require you to account for VAT if there’s any private use whatsoever of a company-owned asset, HMRC has the discretion to overlook this and will usually do so if the private use is insignificant. For example, the employee is allowed to drive a company van home after a job rather than return it to base.

Temporary private use

If you haven’t made a VAT adjustment because no private use of the asset was expected at the time of purchase, but the asset is temporarily available to an employee or director for private use, this counts as a supply for VAT purposes and you must account for VAT on the value of that supply.

Valuing the private use

The VATable amount is equal to the depreciation of the asset during the VAT period plus any expenses the business incurred, multiplied by the proportion of private use to total use. The private use factor in the calculation is determined by the actual private usage and not, as is the case with income tax and NI charges, its mere availability for private use.

Example. In the VAT quarter ended 30 June 2020 Acom Ltd allowed one of its employees to use a company van (which cost £20,000 plus VAT in 2018), despite not needing it for work since early April because of coronavirus. The business mileage in the period was 200 and the private mileage 400. On 20 April Acom received a bill for £250 plus £50 VAT for servicing the van in March. Usually, the most practical way to arrive at the depreciation figure is to use the amount used for accounting purposes. Acom depreciates its vans at 20% of cost per annum on a straight-line basis. Therefore, in its VAT return for the quarter ended 30 June 2020 Acom accounts for VAT on the private use of the van on an amount of £800 ((£20,000 x 20% depreciation/12 months x 3 months) + £200). The VAT payable is therefore £160 (£800 x 20%).

Tip. At the time of publication HMRC hasn’t offered a concession for the VAT charges described above where they occur because of coronavirus. However, you can reduce them by charging your employee a small amount for private use. In that case, VAT is only due on the amount you charge and not the depreciation plus costs.

VAT applies to the temporary private use of a company-owed van. The VATable amount is the van’s depreciation costs plus, e.g. servicing for the period multiplied by the proportion of private compared to total use. Override this calculation by charging the employee a small amount for the private use. VAT is only due on the amount charged.

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