Cars and the Flat Rate Scheme - what you need to know
QUESTION: I run my own small business and I have started doing a lot more mileage this past few years. I am considering buying a new car and I would like to buy the car under some sort of finance and the dealer has told me I can reclaim the VAT plus other tax advantages. However, as I am on the VAT Flat Rate Scheme I want to know how this affects my VAT reclaim?
ANSWER: The Flat Rate Scheme is designed to simplify your record keeping of sales and purchases. It allows you to apply a fixed flat-rate percentage to your gross turnover to arrive at the VAT due. Fixed-rate percentages vary depending on the type of business.
The main benefits of the scheme are simplified record keeping, as you do not have to keep detailed records of sales and invoices; fixed-rate percentages that are lower than the standard rate; and it helps manage cash flow
The scheme is for businesses with a turnover no more than £150,000 a year, excluding VAT. The Flat Rate Scheme is a simpler method of working out the VAT you have to pay to HMRC and so is unsuitable where you regularly receive repayments from HMRC.
If you use the Flat Rate Scheme, you do not recover input tax or VAT on imports or acquisitions. This is because the flat rates are calculated to represent the net VAT you need to pay to HM Revenue and Customs (HMRC). In other words, an allowance for input tax is built into the flat rates. There are special rules when you buy high value capital goods eg cars and plant and equipment for your business.
Normally, if you were to acquire the car under contract hire (effectively 'rent'), as a VAT-registered business you could recover some VAT. The amount of VAT recoverable on the invoice is likely to be restricted to 50 per cent.
However, as you use the Flat Rate Scheme, I'm afraid this isn't possible. As you probably know, the Flat Rate Scheme has many advantages but one of its draw-backs is that you can't reclaim the VAT on your purchases, except for the VAT on certain capital expenditure costing £2,000 (including VAT) or more.
If you were to purchase the car under hire purchase or in cash, you're also unlikely to be able to recover the VAT unless you can demonstrate that the car is only used for business purposes- and is not even available for private use. Private use includes commuting from home to work.
Otherwise the only way you may be able to claim all the VAT on a new car if it's mainly used as a taxi, for driving instruction or for self-drive hire.
So whether you rent or acquire the car in some other way, it's unlikely you'll be able to recover the VAT; either because you are using the Flat Rate Scheme or simply because it is a car you're buying.
An alternative to consider would be to purchase a van. If they meet certain conditions, they can offer a lot of advantages when it comes to tax.
:: Malachy McLernon (firstname.lastname@example.org) is a director of PKF-FPM (www.pkffpm. com). The advice in this column is specific to the facts surrounding the question posed. Neither The Irish News nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.