VAT and private use of a company van

HMRC approach

If you use equipment for which your business has reclaimed VAT for private proposes, HMRC’s view on how to account for this is reasonable. This includes vans and commercial vehicles. Its guidance says no adjustment to your VAT account is needed for “incidental private use of most types of commercial vehicle” . The key word in that statement is “incidental”. What HMRC means by this is often misunderstood.

Example. Mark travels to a site to carry out work for one of his firm’s customers. While there he uses the van to visit some friends who live nearby. The purpose for making the journey to and from the customer’s premises is business but also gets him in the vicinity of his friend’s home. This is incidental private use and can be ignored. However, the extra mileage Mark covers from the customer’s premises to visit his friends is wholly private and strictly an adjustment is required to his firm’s VAT account.

Private use adjustments

There are two ways you can work out and account for VAT adjustments. The apportionment method which is done at the time you reclaim VAT on the purchase of the vehicle, or the Lennartz method which requires you to account for private use in each VAT return it occurs

Apportionment

You can use any method of working out the private use that is fair and reasonable. This requires you to estimate the proportion of private use over the period you expect the vehicle to be owned by your business. For example, project the total mileage you expect the vehicle to cover and how much of it might be private. You can use your past records to help with this. You then reduce the total amount of purchase VAT you’re reclaiming by the percentage or fraction of private to total mileage.

HMRC doesn’t expect you to keep reviewing the adjustment to make sure it stays reasonably accurate. However, you should keep records to show the basis for your original calculation. Even if unexpected events cause it to be wrong HMRC cannot ask you to repay some of the VAT you reclaimed. Conversely, if you overestimated the private use meaning that you reclaimed too little VAT, you can’t change your claim.

Lennartz

If you can’t make a reasonable estimate of future private use, or you just prefer not to, you can instead account for the VAT adjustment by following the Lennartz method. This involves two steps:

• claiming 100% of the purchase VAT for the van in the quarter in which it’s purchased
• working out the actual private use for each VAT return period over the course of the following five years.

The Lennartz method is more fussy and involves more calculations but is more accurate and gives you a cash-flow advantage because you can reclaim all the purchase VAT up front.