Input VAT Recovery on Car Repairs

In the case of U-Drive Limited (UDL) v HMRC, the taxpayer ran a vehicle hire business and was appealing HMRC’s decision to block input VAT recovery in relation to the cost of certain vehicle repairs.

 

When UDL customers rented a vehicle, they were supplied with an insured vehicle under UDLs fleet insurance. As UDL were self-insuring (through a captive insurance company), it was in their financial interest to minimise the cost of repairs for vehicles damaged in collision with their hire cars. In cases such as this, where one of UDLs hire vehicles had caused damaged to another vehicle, UDL themselves would directly contract a car repair business to undertake the necessary repairs on the damaged vehicle as an alternative to an insurance claim.

 

The car repair business, who had no contract with the car owner, would then invoice UDL inclusive of VAT. UDL submitted a voluntary disclosure for the repayment of £17,640 VAT incurred in relation to such repairs. This claim was refused on the basis that the services of the car repair business were supplied to the car owner and not to UDL themselves, meaning UDL were not entitled to recover the input VAT incurred on such services. UDL appealed this decision and the case went to the First Tier Tribunal, who considered the recipient of the car repair services further.

 

The First Tier Tribunal ruled in favour of HMRC after concluding that the services provided in repairing the car owner’s vehicle after an accident with a hired UDL vehicle were supplied to the car owner themselves and not to UDL, denying their right to input VAT recovery.

 

If you or your client operate a vehicle hire business and incur similar costs, or if your businesses incurs costs on behalf of a third party and are unsure of the correct VAT treatment, please speak to one of our expert consultants on our free VAT helpline.

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