Reclaiming VAT on Hire Purchase Agreements: A Guide for Businesses

If you`re a business owner looking to finance equipment or vehicles, a hire purchase agreement may be an attractive option. However, it`s important to understand how VAT works in these agreements and how you can reclaim it.

What is a Hire Purchase Agreement?

A hire purchase agreement is a type of financing where the business hires the equipment or vehicle and makes payments over a set period of time. At the end of the agreement, the business has the option to purchase the equipment or vehicle outright for a set price.

How Does VAT Work in a Hire Purchase Agreement?

In a hire purchase agreement, VAT is charged on each payment made by the business. The VAT is calculated based on the monthly repayment amount, which includes both the principal amount and the interest charged.

The VAT is included in the repayment amount, so the business does not need to separately pay the VAT. However, the business is not able to claim the full VAT amount upfront.

How Can Businesses Reclaim VAT on Hire Purchase Agreements?

To reclaim VAT on hire purchase agreements, businesses must follow certain procedures and meet specific criteria. Here are the steps to follow:

1. Determine Eligibility

To reclaim VAT, the business must be registered for VAT and must use the equipment or vehicle for business purposes. If the equipment or vehicle is used for both business and personal use, the business can only reclaim the VAT on the percentage of use that is for business purposes.

2. Keep Records

The business must keep accurate records of the hire purchase agreement, including the repayment schedule, the VAT charged, and the purpose of the equipment or vehicle. These records must be kept for at least six years.

3. Calculate VAT Reclaimable

The business can reclaim the VAT on the principal amount of the equipment or vehicle. To calculate the VAT, multiply the principal amount by the VAT rate (which is currently 20%). For example, if the principal amount is £10,000, the VAT reclaimable would be £2,000.

4. Submit a VAT Return

The business must include the VAT reclaimable in its VAT return for the period in which the hire purchase agreement was entered into. The VAT reclaimable can be offset against other VAT owed by the business for that period.

Conclusion

Hire purchase agreements can be a useful way for businesses to finance equipment or vehicles. However, it`s important to understand how VAT works in these agreements and how to reclaim it. By following the steps outlined above, businesses can ensure they are reclaiming the VAT they are entitled to.