Does the company have to charge VAT on the recharge as it has already restricted the input tax?
As the decorating company has, up to this point, been using the car for both business and private purposes, the flat 50% restriction applies to the input tax to reflect a notional amount of private use. Following the reorganisation, as the company will then be using the vehicle exclusively for business, effectively leasing it on to the building company, it should recover the input tax from the leasing company in full. It will then charge 20% VAT on the recharge, and the 50% restriction will apply in the building company.
There are special provisions where the input tax on a leased car is hired on for no consideration or below normal commercial value. In these circumstances, there is no supply for VAT purposes, so no VAT would be charged from one company to the other and the 50% block would remain for the first company.
The legislation for this is in the VAT (Cars) Order 1992 (SI 1992/3122) at Article 4(1)(f)
4(1) Subject to paragraphs (1A) to (2) below, each of the following descriptions of transactions shall be treated as neither a supply of goods nor a supply of services–
4(1) (a) to (e) omitted
(f) a relevant supply of services by a taxable person to whom a motor car has been let on hire or supplied or by whom a motor car has been acquired from another member State or imported.
4(1A) and 4(1AA) omitted
4(1B) Paragraph (1) above shall not apply in relation to a case falling within paragraph (1)(f) above unless the tax on any previous letting on hire, supply, acquisition or importation was wholly or partly excluded from credit under section 25 of the Act.
4(1C) For the purposes of paragraph (1)(f) above a relevant supply of services is–
(a)the letting on hire of a motor car to any person for no consideration or for a consideration which is less than that which would be payable in money if it were a commercial transaction conducted at arm’s length; or
(b)the making available of a motor car (otherwise than by letting it on hire) to any person (including, where the taxable person is an individual, himself, and where the taxable person is a partnership, a partner) for private use, whether or not for a consideration.
4(2) Nothing in paragraph (1)(a) or (b) above shall be construed as meaning that a transaction is not a supply for the purposes of section 11(1)(a) of the Act.
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