November 1st 2016

Kevin Ferguson looks at whether it is possible to reclaim VAT on the purchase of a car.

Kevin D. Ferguson BA CA, Partner , JRW Chartered Accountants
Kevin D. Ferguson BA CA, Partner , JRW Chartered Accountants

The issue of VAT on cars is something that we get asked about on a regular basis, in particular ‘VAT Qualifying Cars’.

The phrase ‘VAT Qualifying Car’ is more relevant to the motor trade than to the public or other businesses.  This tells the motor trader what method of VAT accounting has been applied to the vehicle to that point as it is not the ‘normal’ rules for VAT on cars.

However, we occasionally hear that sales people have implied that business clients who are registered for VAT can reclaim the VAT on these cars, hence reducing the cost, but in fact the normal restrictions do still apply and, for the majority, will block the recovery of VAT when you buy a car, even for use in your business.

Hopefully the following questions and answers should clarify the situation for you.

Is VAT always required to be paid on the purchase of a new car?
VAT will always be payable on the purchase of a new car in the UK or one which has been imported into the UK from overseas.

Will I be charged VAT on a car purchased for private purposes?
If a new car is bought by an individual for private purposes VAT will be required to be paid and there will be no way to recover this by the individual.

Is this the case when I purchase a used car?
Sometimes individuals will opt to purchase a used car from a dealer, however VAT is still required to be paid on a used car. Some car dealers will charge VAT only on the profit which is made on the sale of the car, however, dealers can charge VAT on the total price which the car is sold for second hand (these are the VAT Qualifying cars).

Is the vehicle actually a car?
This might be a strange question, but if you are buying a vehicle for your business, it is important to firstly establish whether the vehicle that is being purchased is in fact a car. This is necessary because there are different criteria for purchasing a commercial vehicle rather than a car, factors which will be taken into account include the minimum weight of the vehicle and the availability of glazed and roofed accommodation behind the driver.

It is always worthwhile checking whether the vehicle that you have purchased is in fact a commercial vehicle. Certain vehicles which are viewed as commercial vehicles may fall within the definition of a car for VAT purposes so it is always worth checking the specification prior to purchase.

You could avoid any dispute over your claim if you choose to buy a small van instead of a car as the block on VAT recovery doesn’t apply to vans. Some vans are very suitable substitutes for cars.

Can I can claim VAT back for a car that has been purchased for business purposes?
Once a vehicle is established as being a car, the main question an individual running a business is required to answer is whether they can in fact claim back VAT on that car. Based on the assumption that you are registered for VAT and are entitled to recover VAT in other costs, the VAT incurred on the purchase of the car can only be recovered if that car is used exclusively for business purposes.

But what does exclusively used for business purposes actually mean?
A car will be used exclusively for business purposes when it is not used for private use at all. This means that it will be difficult for the purchaser to prove that the car is used solely for business purposes as most cars provided to staff to undertake their job will probably also be used by that member of staff outside of work as private use too.  If there is any private use at all no VAT can be recovered on the purchase of the car at all.

Is this likely to be challenged?
Yes, any claim to refund VAT on the purchase of a car is very likely to be challenged by Customs and Excise on principle. Regardless of whether there has been a regulated policy put in place by you as an employer, there is always likely to be some form of personal use, for example Customs and Excise will view an employee keeping a company car at home overnight as personal use regardless of whether they actually use the car for any other purpose than business.

A successful claim is only possible where two tough conditions, which HMRC enforces rigorously, are met as shown in the following case.

The Case
Zone Contractors Ltd (Z) was successful in arguing its case at the First-tier Tribunal (FTT) for the recovery of VAT it paid on the purchase of six cars, which it provided to its employees for use in its construction business.

The legislation only allows you to reclaim VAT on the cost of a car where: it’s used exclusively for business purposes; and it is not made available for private use. The first condition is self-explanatory, but the second can be interpreted more than one way. Certainly HMRC and Z had differing views.

Useage and Conditions
The cars were always parked overnight at the company’s premises or left at the site where the employees were working. This seemed to meet the first condition, but HMRC said that in practice the employees took detours to buy cigarettes or lunch while out on a business journey. The FTT said that such minimal journeys were inevitable and decided that this must have been understood when the rules were written. Minimal use of that sort must be allowed or the rules would have simply blocked VAT recovery without exception.

Importantly, the company made each employee sign an agreement which included a clause saying:

“It is hereby strictly forbidden for the Employee to use the Company vehicle for any personal use inside/outside their employment hours. Any Employee found to be contravening this will be subject to Disciplinary Procedures. The Company vehicle must be returned to the nominated address after use as instructed by the Director.”

GOOD TO KNOW – A clause similar to that used by Z is vital if you are to stand any chance of successfully reclaiming VAT on the cost of a car. Plus, it should be in place at the time of purchase for each employee (including Directors) who might drive the car.

GOOD TO KNOW – The clause should be included in the employee’s employment contract or an agreement for use of the car. It’s probably not strong enough to just include it in a policy statement which doesn’t require the employee’s signature.

As outlined above, the firm could have avoided any dispute over its claim if it had bought small vans instead of cars as the block on VAT recovery doesn’t apply to vans. We suspect HMRC will appeal against the decision mainly in respect of the non-business use. However, it’s worth making a claim based on the decision in this case as long as you meet the conditions as interpreted by the FTT.

When the cars were bought, the employees’ contracts banned them from all non-business use. In practice they used them for minor trips to obtain lunch while travelling on business. The FTT thought this was allowed by the VAT rules, but if you reclaim VAT based on this case do bear in mind that it might be overturned.

JRW Chartered accountants in Edinburgh, Galashiels, Hawick, Langholm and Peebles.