VAT on cars: all you need to know

The wide range of different expenses that a business can incur has given rise to complex VAT regulations. Expenses as diverse as overnight accommodation, gifts, the costs of entertaining staff and clients, car parking costs, road tolls, taxi journeys, food and drink, fuel and public transport are all covered by extensive VAT rules.

As with most other goods on the market, VAT is charged on the purchase of new cars at the standard rate of 20%. Reclaiming the VAT on vehicles is a particularly complex issue and the HMRC rules on who can reclaim VAT and under what circumstances are notoriously strict.

VAT on new cars

When anyone buys a new car in the UK, they buy it at what is known as the “On The Road” price, commonly referred to as the OTR price. The OTR is basically the price that has to be paid to legally drive the vehicle on the road. In other words, it includes any delivery charges, registration fees, number plates, road tax, insurance and, usually, at least some fuel in the tank.

The OTR price of a new car also includes the standard rate of value-added tax (VAT), which currently stands at 20%. The VAT is collected by the dealer and is paid to HMRC.

A new car retailing at an OTR of £18,000 includes a total of £3,000 VAT. For a sole trader buying a single vehicle, that’s a substantial amount. When it comes to a larger company potentially buying several new vehicles for their workforce, it’s not surprising that so many businesses are keen to find out whether they can reclaim this cost.

The same rule that applies to reclaiming other business expenses unsurprisingly applies to the VAT on new cars. The only way that VAT-registered entities can reclaim the VAT on a new car is to show that the expense is “wholly and exclusively” for business purposes.

When it comes to justifying the purchase of a ream of paper for an office printer or a delivery of cement at a building site, it is straightforward enough to show that this is for business purposes only and recover the input tax. When it comes to buying a new car, it is much more complicated to be able to guarantee that it will only be used for business purposes.

There are a few ways that companies wishing to reclaim the VAT on the purchase price of a new vehicle can attempt to show that the vehicle will be used wholly and exclusively for the business.

Cars that are used as “pool” cars, in other words, cars which are parked overnight at the workplace and are used by a number of different users can fairly easily be justified as exclusively business vehicles. Such vehicles are usually not parked at a residential address and cannot be used to commute to and from the workplace.

A company wishing to prove that its vehicles are only used for business purposes may also choose to take out insurance only for business purposes, thereby indicating that there will be no personal use of the vehicles. They may also require all employees to sign a clause in their contract stipulating that they will not use the company vehicle for personal use (including commuting). Similarly, their employment contracts may stipulate that company vehicles must be returned to the company car park at night. These are all indications that the company does not intend its vehicles to be used for personal use and may enable them to reclaim the VAT on the OTR price of their new purchases.

As is the case with any VAT reclaims, thorough paperwork must be kept, including detailed mileage records, to ensure that in the event of an HMRC inspection there is evidence of the exclusive business use of the vehicles.

VAT on used cars

There is no VAT on the price of second-hand cars that are bought and sold privately. If the purchase is made through a second-hand dealer, however, VAT may be applied. It is worth finding out more about the precise circumstances in which this may be the case.

The VAT second-hand margin scheme is the VAT scheme that applies to the sale of second-hand vehicles through dealers. Under the terms of this scheme, VAT is applied at a rate of one-sixth of the profit that the dealer makes on the sale and not to the entire price of the vehicle. This VAT is included in the sale price and is not itemised on the invoice.

When the VAT margin scheme is used and the buyer is VAT-registered, they can reclaim the VAT on the purchase. In this case, the vehicle is then referred to as “VAT-qualifying”. This is important if the vehicle is later sold as the seller is required to charge VAT on the sale and return the corresponding amount to HMRC.

Many businesses see buying second-hand vehicles rather than brand new ones as an attractive option.

VAT and commercial vehicles

When it comes to buying commercial vehicles, such as lorries, vans, buses and trucks, the VAT is usually deductible for VAT-registered entities as the vehicle is obviously to be used for business purposes.

The definition of a “commercial vehicle” is surprisingly complicated and centres around vehicles such as pick-up trucks and 4x4s, which can serve as both commercial vehicles and private vehicles. HMRC has published a list of what are referred to as “car-derived vans” that details the classification of these vehicles as

commercial vehicles or cars for VAT purposes.

HMRC considers any incidental use of a commercial vehicle for private purposes to be minimal and so this does not affect the VAT treatment of the vehicle. However, when the private use of a commercial vehicle extends beyond minimal use, the business can reclaim the proportion of VAT corresponding only to the business part of the use.

As is always the case, detailed records must be kept in order to document the mileage on commercial vehicles if the owner wishes to reclaim all or a proportion of the VAT.

Other exceptions

The VAT on the purchase of certain new vehicles can be reclaimed. This is the case for vehicles to be used for the purposes of:

Taxis
Self-drive hire
Driving instruction

As long as the car meets certain technical specifications presented by the HMRC and is used for one of these three uses, the VAT of the purchase price can be reclaimed by VAT-registered entities.

Specific VAT rules apply to vehicles that are leased under the terms of finance purchase schemes. If you think this may apply to your situation, it is a good idea to investigate these rules further through the HMRC website.

Conclusion

The decision to purchase one or more vehicles may be one of the biggest financial investments a business makes. Being fully informed of all the options beforehand, particularly around VAT, is essential. Carrying out a full examination of your business needs and analysing the VAT implications makes good business sense. Whether it comes to large purchases or smaller everyday business expenses, a Mooncard corporate card can facilitate VAT record keeping and reclaims.

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