VAT recovery on cars and vans

If you're VAT registered business and use a vehicle for work, it's important to understand the different rules for VAT recovery on cars and vans.

We covered the direct tax (i.e. non VAT treatment of cars and vans in previous articles so this time we're going to focus more on the VAT treatment.

VAT recovery on cars and vans

When considering VAT recovery on cars and vans, whether a vehicle is regarded as a car or not is determined by various conditions.  It's always a good idea to check the list which is published by HMRC as a starting point. We'd mention though that this list is by no means exhaustive and is not updated regularly.

It is very difficult to reclaim input VAT on the purchase cost of a car. However, VAT can be claimed on the cost of a commercial vehicle, including a van.

VAT recovery on cars and vans - exceptions for cars

Whether you buy a car outright, by hire purchase or lease purchase, recovery of the input VAT charged is normally blocked by the VAT rules. However, there are some exceptions to these rules:

  • Where a car is used exclusively for business purposes and is not made available for private use. The vehicle concerned must not have been subject to a prior claim which has been blocked by HMRC.
  • The car is used primarily for taxi services, self-drive hire (normally less than 30 days), or driving instruction. Again, there must not have been previously claim which has been rejected by HMRC.  You also cannot make a claim on these grounds if no consideration is received for leasing the vehicle.
  • The car is part of the stock of a motor manufacturer or motor dealer.
  • Where The car has been adapted for use by a disabled person. HMRC have published guidance where these rules will apply.

Probably the most difficult hurdle to overcome is where you are trying to demonstrate that a car is used exclusively for business. Naturally the taxman will require evidence to support any claim on these grounds.

Exclusive business use means that there is no private use and that the car is not available for private use. This principle was established in the so-called 'Fagomatic' case. So in order to demonstrate exclusive business use you would need to takes steps to ensure that private use is prohibited.

This could include (though is not limited to) taking the following steps:

  • Keeping the car at the company premises with the keys locked (in a safe) at night
  • An insurance policy on the car solely for business use
  • A signed agreement between employee and employer
  • Installing a tracker in the car. However this will only provide evidence of trips undertaken not the fact that private use is prohibited.

It's difficult to argue private use is prohibited where you run your own company and even more so where you are a sole trader. Though not impossible if you read this tax case here

What about pool cars?

HM Reveue might accept exclusive business use where a vehicle is normally kept at the business  premises, not allocated to one individual. Additionally they should not usually be kept at an employee's home. In such circumstances it's important to have a legally binding agreement to prohibit private use. This evidence proved to be highly effective in the Zone Contractors tax case.

VAT recovery on cars and vans - leased vehicles

Where the car is a leased 50% of  the input VAT is blocked.  Therefore 50% of the VAT on the hire payments is recoverable. This is the case  even if the car is used for private purposes. All of the VAT can be recovered where the exceptions detailed above apply.

VAT on fuel and mileage

Input VAT can be recovered on all fuel incurred for business purposes.   When your vehicle is not used exclusively for business purposes you'll need to restriction the VAT claimed. This point was tested before the tax tribunal recently

You can also recover VAT on mileage allowances paid to your employees. This point has already been covered in one of our previous blogs.

For more useful information, check out our Ebooks here.

And if you'd like to know how we can help you with all of this, or with anything else, feel free to give us a call on 01202 048696 or email us at [email protected].

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