Small Business - Car Finance

fighting_chaos

I have just become VAT registered and think I am doing ok apart from when it comes to car finance. I have three company vehicles all bought on finance and I therefore pay direct debits each month for them. For accounting purposes and possible VAT purposes, do I have to seperate the interest that is added on a monthly basis and then just record the net cost in purchases and the interest in the bank spreadsheet? Also, am I allowed to claim back the VAT?

I have phoned the Inland Revenue VAT helpline but the guy I spoke to didn't have a clue when it came to Hire Purchase agreements as it is not specified clearly in their guidelines.

For my last VAT submission (which was my first) I didn't include anything but fuel as I wasn't sure.

I hope that makes some sense to someone cos I think I am just losing the plot now.

Cheers

Torby

I have to purchase a vehicle for my business...but as we don't have a large income at the moment...it looks as if I might be paying the cost myself..... I look forward to reading the responses on your question

Bean_Counter

fighting_chaos wrote: »

I have just become VAT registered and think I am doing ok apart from when it comes to car finance. I have three company vehicles all bought on finance and I therefore pay direct debits each month for them. For accounting purposes and possible VAT purposes, do I have to seperate the interest that is added on a monthly basis and then just record the net cost in purchases and the interest in the bank spreadsheet? Also, am I allowed to claim back the VAT?

I have phoned the Inland Revenue VAT helpline but the guy I spoke to didn't have a clue when it came to Hire Purchase agreements as it is not specified clearly in their guidelines.

For my last VAT submission (which was my first) I didn't include anything but fuel as I wasn't sure.

I hope that makes some sense to someone cos I think I am just losing the plot now.

Cheers

Hi,

I noticed that no-one has replied, so I thought I would give it a go.

For the purpose of this, I am assuming that you have bought a car rather than a van, and that you have an actual hire purchase agreement rather than a contract hire or some other arrangement. The following would differ is either of these are not true.

Firstly, regarding the accounting of the direct debit payments, what I do when we buy a car on HP is that the capital element of the car goes into the balance sheet as an asset and the corresponding HP debt goes into the balance sheet as a liability. For each direct debit payment made, you split the payment into the capital element and the interest element. The capital element reduces the HP debt and the interest element is a cost in the profit & loss account. After you have made the final HP payment, the HP liability will have been reduced to zero. The amount that was created as an asset is reduced over time by depreciation.

You would also get capital allowances in your tax computation for the car.

Regarding VAT on the direct debit, VAT is not normally reclaimable on HP cars and is included in the initial cost. There are no VAT implications in the monthly direct debit payments (except maybe in the first and last payments when there might be VAT on the admin and option to buy charges.)

I hope that was what you were after. If not let me know and I'll have another go!

fighting_chaos

Thanks for your reply. The vehicles I was referring to were 1 car and 2 vans and they are all on hire purchase agreements.

Your post makes perfect sense, and although I kind of thought the same, I needed someone else to tell me, just to make sure. I get a bit nervous when it comes to official Inland Revenue stuff!

Bean_Counter

fighting_chaos wrote: »

Thanks for your reply. The vehicles I was referring to were 1 car and 2 vans and they are all on hire purchase agreements.

Your post makes perfect sense, and although I kind of thought the same, I needed someone else to tell me, just to make sure. I get a bit nervous when it comes to official Inland Revenue stuff!

The vans work in pretty much the same way, except you can claim the VAT back on the initial purchase on your next VAT return. Again no VAT implications on the regular monthly direct debits.

Just make sure that the vans actually comply with HMRC description of vans, which is here.

Just out of interest, are you are a limited company, and if so, are you aware of the changes in the benefit in kind rules for vans for this year?

fighting_chaos

Thanks for all your help, it is greatly appreciated. I have found out more from a few threads than I have from about five phone calls to IR.

We aren't a limited company, although we have considered it but I don't really know what the advantages of such a move would be (apart from limited liability if anything was to go wrong).

Thanks again

Bean_Counter

fighting_chaos wrote: »

We aren't a limited company, although we have considered it but I don't really know what the advantages of such a move would be (apart from limited liability if anything was to go wrong).

Best to speak to your accountant if you have one. With the small business rate of corporation tax going up and the standard rate of income tax coming down, then make sure it is the right move for you.