VAT and cars- A basic introduction

This article outlines the VAT implications when buying or leasing a new company car, further articles will look at fuel and servicing costs.

Is it a car?

If a business can ordinarily recover all of its VAT, it should be able to recover VAT on the purchase of a commercial vehicle, provided any private mileage is incidental. Some “daily drives” are not regarded as cars for VAT purposes, e.g. those with an unladen weight of 3 tonnes or more or a payload of one tonne or more. HMRC would expect a business purchasing a “van” to apportion the input VAT, or account for output tax in relation to any significant private motoring.

If you are considering the purchase of a Landrover commercial, twin cab pickup, or very large SUV it is worth researching whether this is treated as a car for VAT purposes. This resource may assist HM Revenue and Customs: car derived vans and combi vans (publishing.service.gov.uk)

Vehicles constructed for a special purpose, e.g. a hearse, where carrying passengers is incidental, are not cars either.

VAT recovery on a car, (including electric cars) is very likely to be restricted unless the car:-

1. is stock in trade of a motor manufacturer or dealer;
2. is purchased by a leasing company for letting to a customer at a commercial rate;
3. is intended to be used primarily as a taxi, driving instruction car, or self-drive hire; or
4. will be used exclusively for the purposes of your business and would not be made available for the private use of anyone

The final category causes most issues in practice. Basically, the business needs to satisfy HMRC that it has taken active steps to prevent the possibility of any private use. A key step would be for a business to place a prohibition on the private use of company cars in an employee’s employment contract, which is enforced in practice. Further, even if the car is a genuine pool car purchased solely for business journeys and which is kept overnight at the business premises, physical control over the keys; keeping a log of journeys; and where possible, ensuring the car is for business only motoring are important additional steps.

If the business cannot meet any of i-iv, it will not be entitled to reclaim any VAT on the purchase of a car. If the car is leased, 50% of the VAT can be reclaimed (subject to any further restriction if the business is partly exempt.)

Under a lease, the lessor will charge VAT on each rental payment; whereas, under HP or similar, it will account for VAT upfront.

If the car is financed under an agreement where the business will own the car at the end of the agreement it is treated as a purchase. This will include flexible leases where at the end of the period, the customer can choose to:-

1. purchase the car for an additional option payment;
2. return the car; or
3. extend the hire

if the option fee is low enough that exercising the option is the lessee's ‘only economically rational choice’ at the end of the agreement.

For most businesses, justifying VAT recovery on the purchase of a car is difficult. It is not enough that the business expects to use the car predominantly for business journeys, the criteria are whether the car is “available” for private use.

If you would like to discuss your business’ circumstances in more detail, please contact us.