How to account for VAT on vehicles and fuel you use for your business is a relevant article for anyone who’s registered for VAT and is charged VAT on motoring expenses.
A car for VAT purposes is any motor vehicle of a kind normally used on public roads which has 3 or more wheels and either:
- – is constructed or adapted mainly for carrying passengers
- – has roofed accommodation to the rear of the driver’s seat that’s fitted with side windows or that’s constructed or adapted for the fitting of side windows
The following are not considered as cars for VAT purposes:
- – vehicles capable of accommodating only one person or suitable for carrying 12 or more people including the driver
- – caravans, ambulances and prison vans
- – vehicles of not less than 3 tonnes of unladen weight
- – special purpose vehicles, such as ice cream vans, mobile shops, hearses, bullion vans, and breakdown and recovery vehicles
- – vehicles with a payload of one tonne or more
Recovering the VAT charged on buying, importing or acquiring a car
As a general rule, you cannot recover the VAT on the purchase.
But if you buy, import or acquire one of these excepted cars, you may recover VAT in full.
A car which:
- – is a stock in trade of a motor manufacturer or dealer.
- – is intended to be used primarily as a taxi, driving instruction car, or self-drive hire.
- – will be used exclusively for the purposes of your business and will not be made available for the private use of anyone
Stock in trade car
A stock-in-trade car is one which is either:
- – produced by the manufacturer who intends to sell it within 12 months of its production
- – obtained by a dealer who intends to sell it within 12 months of the date that VAT was incurred on its purchase, acquisition or importation — stock in trade cars do not include second-hand cars that are not qualifying cars
Car ceasing to be stock in trade
A car remains stock in trade for so long as it’s the intention of the dealer or manufacturer to sell it within the next 12 months.
If a car ceases to be stock in trade and no longer qualifies for input tax recovery under one of the other exceptions, a self-supply occurs (read ‘3.10 Changing the use of a car’ section on this page for more information).
Recovering the VAT incurred when a car is bought primarily for taxi self-drive hire or driving instruction
You can recover the VAT incurred, but only if the car is a qualifying car and you intend to use it primarily for:
- – hire with the services of a driver for the purpose of carrying passengers
- – self-drive hire
- – providing driving instruction
A car used exclusively for business purposes
A car is used exclusively for business purposes if you use it only for business journeys and it is not available for private use. This means that you do not intend to make it available for the private use of employees or anyone else.
Input tax on leased cars
Leasing company recovering VAT on the purchase of cars
You can recover the VAT as long as the cars are leased at a commercial rate. You must include a statement as to whether or not each car that you lease is a ‘qualifying car’ on the tax invoice you issue. Your customer needs this information.
Business leasing a car and recovering the VAT
If you lease a ‘qualifying car’ (read ‘2.3 Qualifying car’ section on this page) for business purposes you cannot normally recover 50% of the VAT charged. The 50% block is to cover the private use of the car. You can reclaim the remaining 50% of the VAT charged, subject to the normal rules. The VAT guide (Notice 700) the VAT guide and Notice 706: partial exemption give more information.
Cars leased primarily for taxi or driving instruction
You can reclaim all of the VAT charged on the lease if the car is a qualifying car and you intend to use it primarily for:
- – hire with a driver to carry passengers
- – providing driving instruction
Terminating your lease early
If you terminate your lease early, the leasing company will treat the termination payment and any associated rebate of the rental as taxable. It will normally offset the termination payment against the rebate and issue you with a VAT invoice for the difference.
50% block applying to early termination of a lease
From 1 April 2022, if you terminate a contract early, the fees charged are regarded as further consideration for the contracted supply.
The 50% block applies because the termination charge is an additional charge for the rental of the car. You cannot recover 50% of the VAT shown on the invoice.
If the rebate exceeds the termination payment, the leasing company will issue you a VAT credit note for the balance.
If VAT on your rentals was 50% restricted, you need to adjust only 50% of the VAT credit in your VAT account.
Input tax on repairs and other motoring expenses
Recovering VAT charged on repairs and maintenance
If you use a vehicle for business purposes, you can reclaim the VAT you were charged on repairs and maintenance as input tax as long as the business paid for the work. It does not matter if the vehicle is used for private motoring or if you have chosen not to reclaim VAT on road fuel.
If you’re a sole proprietor or partner and use a vehicle solely for your own private motoring you cannot reclaim the VAT on repairs as input tax.
Recovering VAT charged on accessories
When you buy a car on which VAT was blocked, you cannot recover the VAT you have been charged on accessories fitted to it at the time of purchase.
This applies even if the car dealer itemises them on the sales invoice or invoices them separately. This is because the accessories form part of a single car supply, which is subject to the input tax block.
Buying the accessories later
If you buy accessories later and the vehicle is either owned by the business or used in the business but not owned by it (perhaps an employer or director’s own car), the VAT charged is not input tax unless the accessory has a business use.
Recovering VAT on other motoring expenses
The VAT you incur on all other business motoring expenses (perhaps fleet management charges or parking charges) is input tax and recoverable, subject to the normal rules. The VAT guide (Notice 700) and Notice 706: partial exemption give more information.
How can MCL Accountants help with your queries on How to account for VAT on vehicles?
Contact MCL Accountants on 01702 593 029 if you have any queries on how to account for VAT on vehicles 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.