What is the background?
Where a business is VAT registered and the income it generates is “taxable” (i.e., subject to VAT at either the 0%, 5% or 20% rates) then it is normally entitled to reclaim the VAT it incurs on costs associated with generating this taxable income, including overhead costs. However, where a cost (such as a vehicle) is partly used for business purposes and partly for a non-business purpose, the VAT rules require the business to apportion its input tax and restrict (not reclaim) an element for use of the asset for non-business purposes.
What is the issue?
For most businesses it is virtually impossible to demonstrate that it uses its vehicles solely for a business purpose so will be subject to some form of input tax restriction. Added to this are further complexities to VAT rules depending on whether a vehicle is treated by VAT legislation as a “motor car” or not, with a range of modern vehicles such as combi-vans and double cab pickups falling into a borderline category.
At present the rules apply irrespective of fuel type and there is no favourable treatment for EVs.
So, what is a “motor car” for the purposes of VAT legislation?
A “motor car” means any motor vehicle of a kind normally used on public roads which has three or more wheels and either:
- is constructed or adapted solely or mainly for the carriage of passengers; or
- has to the rear of the driver’s seat roofed accommodation which is fitted with side windows or which is constructed or adapted for the fitting of side windows.
However, the definition of “motor car” does not include:
- vehicles capable of accommodating only one person;
- vehicles capable of carrying 12 or more seated persons;
- vehicles of not less than three tonnes unladen weight;
- vehicles constructed to carry a payload of one tonne or more (this is the helpful exclusion for most double cab pickups);
- caravans, ambulances and prison vans;
- vehicles constructed for a special purpose other than the carriage of persons (other than incidental carriage).
I want to buy or lease a motor car – can I reclaim the VAT?
Other than a genuine pool car which is kept locked at business premises overnight, no VAT reclaim is allowed on the purchase of a motor car.
When leasing or taking out a contract hire of a motor car, 50% of the VAT can be reclaimed.
Where the motor car is funded by a finance agreement further consideration on whether it is treated as a purchase or a lease – N.B. a typical HP contract is regarded as a “purchase” for VAT purposes.
What about vehicles not treated as motor cars?
On the basis that the vehicle falls within one of the exclusions noted above then a business can normally reclaim the VAT in full assuming, of course, that the vehicle is used wholly for a business purpose. This should be uncontroversial for vehicles easily recognised as commercial vehicles such as HGVs, buses, tractors but for vehicles taken home by employees and allowed to be driven for non-business purposes (such as vans), HMRC would expect the business to restrict an element of input tax recovery because of the private (non-business) use. However, unlike the 50% restriction specified in VAT legislation, there are no set apportionment rules so can often lead to a horse trade with a VAT inspector.
How can UNW help?
This article only covers the purchase or lease of a vehicle. There are further complexities around VAT reclaim on running costs, maintenance and fuel, and at present some intransigence by HMRC around re-imbursement to employees of the costs of charging EVs.
Unlike other forms of taxation managed by HMRC, so far we have not seen any amendments to VAT recovery rules around EVs and making them more attractive to run (by reducing the VAT costs) but perhaps that is something we can hope for in the coming months, especially as the UK has much more flexibility over its VAT rates post Brexit.
If you would like more information about this, or any other VAT related matter, please contact one of our dedicated VAT specialists:
T: 07715 704 739
VAT Senior Manager
T: 0191 243 6017