Reclaiming VAT on the purchase of vehicles
VAT is chargeable on all new cars purchased or imported for use in the UK. As a general rule it is not possible to recover the VAT on the purchase of a car unless it is an excepted car, in which case the VAT can be recovered in full.
An excepted car is one which:-
- will be used exclusively for the purposes of the business and is not available for any private use including, for example, a genuine pool car;
- is a ‘stock-in-trade car’ of a motor manufacturer or dealer; or
- is intended to be used primarily as a taxi, driving instruction car or a self-drive, that is daily rental, car.
For these purposes primarily should be taken to be greater than 50%.
Exclusively for business use
To qualify as being available exclusively for business use, a car must be used only for business journeys and not ‘made available’for the private use of anyone, except in the course of a commercial leasing or rental operation.
In practice this is a very restrictive test, with the main beneficiaries being leasing companies because there is no private use of the cars purchased by them even though there may be private use by their customers.
The phrase ‘made available’ has been given a very broad meaning by HMRC. A car is available for private use if there is nothing preventing its private use by anyone, including employees.
Many cases, in which there has actually been no private use of a business car, have failed at VAT tribunal on the grounds of their ‘availability’ for private use; for example the car was allocated to a particular individual or could be parked overnight at a home address. As successful reclaims of input VAT have concerned employer/employee arrangements, the common consensus arising from case law is that it is possible, although difficult, for a family owned company to avoid the input VAT block but probably impossible for a sole trader or partnership
In summary, if a car is ‘made available’ for any private use at all, none of the VAT is recoverable. If this happens and VAT recovery has been blocked, it is generally referred to as a blocked car (or a ‘non-qualifying’ car) and it will retain this status for all future sales. Most company cars will be blocked cars.
If there is no private use, all of the VAT incurred on acquisition of the new car may be recovered as input tax, subject to any partial exemption limitations of the business. Cars that have never been ‘made available’ for private use and consequently never had VAT wholly disallowed on their purchase, are referred to as qualifying cars.
This category applies to the cars that motor manufacturers and dealers hold to sell. To be categorised as a stock-in-trade car, a car must either be produced by a manufacturer who intends to sell it within 12 months of production, or be acquired by a dealer who intends to sell it within 12 months of incurring VAT on its purchase.
Second hand cars that are not qualifying cars cannot be classed as stock-in-trade cars; most second hand cars will not qualify because there will be no VAT to recover.
Taxis, driving instruction and self-drive cars
For input VAT to be fully recoverable the cars must be central to the taxpayer’s business, so the requirement that cars should be used primarily as taxis, driving instruction or self-hire cars means they should be used mainly, that is more than 50%, by the business.
Input VAT may be recovered on the purchase of a pool car provided the car is normally kept at the principal place of business, is not allocated to an individual and is not kept at an employee’s home.
It must be noted that HMRC will pay special attention to pool car arrangements if VAT has been recovered, therefore strict attention must be paid to ensure that the car remains unavailable for private use at all times.
Change of use – Private use of a car purchased for business use
If input VAT was recovered on the purchase of a car its subsequent use must be monitored because output VAT will have to be applied on its ‘current value’ if the car can no longer be regarded as an excepted car; for example, it’s use changes and it is no longer used exclusively for business purposes, which might arise when a pool car is issued to a driver as a company car which they may use privately.
The current value of a car is the purchase price of an identical or similar model. To enable output VAT to be applied the business is deemed to have made a ‘self supply’ for VAT purposes.
Definition of a new car
For VAT purposes HMRC accepts that a car is new even if it has been pre-registered or has delivery mileage.
Businesses cannot reclaim VAT in any circumstance, even if the car is to be used solely for business purposes, if they have purchased a second hand car from a dealer under the motor dealer’s margin scheme.
For other second hand cars, that is those not sold under the margin scheme, the car must be an excepted car for VAT to be recoverable as input VAT.
VAT incurred on the purchase of a commercial vehicle, such as a van or a truck, is recoverable in full as input VAT, subject to any partial exemption limitations of the business.