Can you recover VAT on the company car? With the growing popularity of electric cars, this is a question that recently has been asked multiple times by employers providing their employees with a company car.
Company car purchases fall under specific VAT rules which determine whether the liability can be reclaimed.
When business purchases, imports or makes an intra-EU acquisition of a car, an automatic restriction on input tax recovery may apply, i.e. any input tax incurred is irrecoverable regardless of whether or not the car is used by the business to make taxable supplies.
Can I recover VAT if I lease a car?
If you lease a car, you can usually claim 50% of the VAT. You may be able to reclaim all the VAT if the car is used only for business and is not available for private use, or is mainly used:
- – as a taxi
- – for driving instruction
Can I recover VAT if I lease a fully electric car?
It doesn’t matter as to whether you lease a petrol/diesel car or a fully electric car, you can only recover VAT on company car as per the 50% VAT reclaim rule if the car is available for private use.
Can I recover VAT if I hire a car?
If you hire a car to replace a company car that’s off the road, you can usually claim 50% of the VAT on the hire charge.
If you hire a car for another reason (for example you do not have a company car), you can reclaim all the VAT if all the following apply:
- – you hire it for no more than 10 days
- – it’s used only for business
- – it’s not available for private use
Can I recover VAT if I buy a commercial vehicle?
You can usually reclaim the VAT for buying a commercial vehicle (like a van, lorry or tractor) if you only use it for business.
If they’re used only for business, you can also reclaim VAT on:
- – motorcycles
- – motorhomes and motor caravans
- – vans with rear seats (combi vans)
- – car-derived vans
Reclaiming VAT for additional costs
You can usually reclaim the VAT for:
- – all business-related running and maintenance costs, such as repairs or off-street parking
- – any accessories you’ve fitted for business use
You can do this even if you cannot reclaim VAT on the vehicle itself.
Recovering VAT for used vehicles
The sales invoice for your used vehicle must show the VAT. You cannot reclaim if it does not, for example, if the seller uses the VAT margin scheme.
Definition of a car for VAT purposes
It is important to remember that the block only applies to cars; vehicles that are not cars are not covered by the block and input tax incurred on these is recoverable according to the normal rules.
The definition of a car can be found in section 2 of VAT Notice 700/64 “VAT on motoring expenses”. This guidance accurately reflects the law on the input tax restriction (contained in art. 2 VAT (Input Tax) Order 1992 SI 1992/3222) and states that (emphasis added):
What is a car
A car for VAT purposes is any motor vehicle of a kind normally used on public roads which has three or more wheels and either:
• – is constructed or adapted mainly for carrying passengers; and
• – has roofed accommodation to the rear of the driver’s seat that is fitted with side windows or that is constructed or adapted for the fitting of side windows.
The following are not cars for VAT purposes:
• – vehicles capable of accommodating only one person or suitable for carrying 12 or more people including the driver (this includes vehicles which could carry 12 or more people but cannot because they have been adapted to carry persons in wheelchairs);
• – caravans, ambulances and prison vans;
• – vehicles of not less than 3 tonnes unladen weight;
• – special purpose vehicles, such as ice cream vans, mobile shops, hearses, bullion vans, and the breakdown and recovery vehicles; and
• – vehicles with a payload of 1 tonne or more.
In the vast majority of cases determining whether or not a vehicle is a car is straightforward. However, the ‘payload test’ highlighted above is often overlooked. There are many vehicles, e.g. SUVs, combi vans or car-derived vans, which, while they appear car-like (in that they are used to carry passengers and have passenger seats behind the driver’s seat) have a payload of one tonne or more.
The payload of a vehicle can be confirmed using the manufacturer’s specifications and if it is one tonne or more, it is not a motor car for VAT purposes and the input tax block does not apply so you can recover VAT on a company car. Many manufacturers use the payload as part of their promotional material, eg, advertising that it has a ‘VAT friendly payload’.
If a vehicle has a payload of less than one tonne it is necessary to consider its individual characteristics to determine whether or not it is a car for VAT purposes. Practical guidance on the approach taken by HMRC can be found in HMRC manual VIT50300.
In summary, as a first step, HMRC refers back to the test set out at para. 2.1 of Notice 700/64, ie, is the vehicle constructed mainly for the carriage of passengers?
This question could, for example, be answered by reference to the relative size of the areas for the carriage of passengers and carriage of goods. HMRC publishes a list of models of car derived and combination vans which confirms whether they are regarded as cars or vans for the purposes of the input tax restriction. It is available here.
Finally, in this section, we will consider converted vehicles. In summary, if a vehicle is purchased with the intention of converting it, its use after conversion is relevant for VAT recovery purposes, ie, if a car is purchased with the intention of converting it into a van, it will be treated as a van and input tax recovery may be possible.
However, if a car is converted into a van after it has been purchased it is not possible to go back and recover VAT incurred on its initial purchase. Although if the conversion is undertaken for a business purpose any input tax incurred is recoverable according to the business’s partial exemption position.
Similarly, if a van is purchased with the intention of converting it into a car, it will be treated as a car for VAT purposes and VAT incurred on its purchase is not claimable. If a van on which input tax was recovered is converted into a car after purchase, a self-supply charge is triggered and the business must account for output tax at this point (VAT (Cars) Order 1992 SI 1992/3122, art. 5).
Businesses purchasing vehicles for conversion should refer to the guidance contained in HMRC manual VIT51800 and subsequent pages.
Expenses to which the block applies
The block applies to VAT incurred on the purchase of a company car. This includes the cost of any accessories included with the car at purchase, even if they are separately itemised on the sales invoice.
However, if accessories, eg, sat nav or a tow bar, are purchased later they are not covered by the automatic input tax block and any VAT incurred is recoverable according to the normal rules.
When the automatic block does not apply allowing you to recover VAT on company car
The input tax block applying to the purchase of a car does not apply in some, limited, circumstances. These are that either:
• – the car has been purchased exclusively for business purposes; or
• – the car has been purchased primarily for a relevant purpose, ie, use as a taxi, self-drive hire or for providing driving instruction.
‘Exclusive’ business use
For a car to be purchased ‘exclusively for business purpose’ it is not sufficient that the vehicle was purchased for a specific business reason or that, in reality, it is not used for a non-business purpose (eg, for private travel by an employee), the car must be unavailable for private use.
Some businesses own one or more pool cars for business purposes. Provided that these three conditions are met, HMRC should accept that a pool car is unavailable for private motoring (HMRC Manual VIT52700). The car should be:
(1) – usually kept at the principal place of business;
(2) – not allocated to an individual; and
(3) – not kept at an employee’s home.
In respect of cars that are not pool cars, the test applied by HMRC is whether the car ‘has the potential for private use’, not whether there is any actual private use. This test derives from case law and it is applied strictly when considering whether you can recover VAT on a company car.
It is extremely difficult for a sole proprietor or partner to purchase a car that does not have the potential for private use.
It is much easier to demonstrate a lack of potential for private use if a car is purchased by a company for use by company employees or directors. As an example, rendering it a breach of contract for a director or employee to use a vehicle privately is considered a strong barrier to private use.
Any contractual restrictions on private use must be reflected by the reality of the use of the vehicle. If in practice, the use of vehicles is not monitored or controlled in some way, HMRC may disregard clauses in the contract.
Charging for private use
If a charge is made for the private use of a vehicle that is used for business purposes, the input tax block does not apply (the hiring of a vehicle being a business activity) and output tax is due on the hire charge.
Businesses that permit employees, directors or other persons to use their vehicles privately in exchange for a hire charge must ensure that the charge is set at a commercial level. Charging a non-commercial fee is regarded as making the vehicle available for private use (VAT (Input Tax) Order 1992 SI 1992/3222 art. 7(2G)(a)).
If a car is used primarily for a relevant purpose, ie, as a taxi, for self-drive hire or for driving instruction, input tax recovery is not blocked, even if there is some private use and you can recover VAT on the company car.
Thus, for example, a driving instructor could recover VAT on a company car even if it was their only vehicle and it was used for some private driving. However, businesses in this position should be mindful that use must be primarily for a relevant purpose and assess each case on its own merits.
Recovering VAT on company car – Final Words
Although it is relatively well known that an input tax block applies to the purchase of a car that is not exclusively for a business purpose, the detail of the definition of a car and the strictness of the exclusive business use condition are often overlooked when considering whether you can recover VAT on a company car.
How can MCL Accountants help?
Contact MCL Accountants on 01702 593 029 if you have any queries on how to recover VAT on a company car or if you need any assistance with the preparation and submission of your business accounts or self-assessment tax returns to HMRC.
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Ishan provides financial management, taxation and transactional advice to business entities of all sizes. His expert areas include statutory compliance, business taxation, personal tax & transactional processing and systems. Industry sectors include professional services, retail, hospitality and entertaining & media and advertising services.