Your guide to VAT on car purchases for business

A business can recover VAT on the purchase of commercial vehicles, according to the normal rules. However, if a business wants to recover VAT on a car purchase, the rules are different. Note, this is only for the purchase of a car and does not apply to the lease of a car. The same rules also apply to electric cars.

 

In summary, VAT is not recoverable on the purchase of a car and it will not make any difference for VAT rules if the car was purchased in the UK or imported from outside of the UK. Import VAT will be charged when a car is imported from outside the UK. However, if the business purchasing the car from the EU is based in Northern Ireland, acquisition VAT will continue to apply.

 

As per the basic definition of a car, “A car for VAT purposes is any motor vehicle of a kind normally used on public roads which has three or more wheels and either:

 

  • is constructed or adapted mainly for carrying passengers; and

 

  • has roofed accommodation to the rear of driver’s seat that is fitted with side windows or that is constructed or adapted for the fitting of side windows.”

 

The definition of a car can be found in section 2 of VAT Notice 700/64 ‘VAT on motoring expenses’.

 

There are a few other conditions such as the number of passengers, weight of the car and other factors.

 

The rules can get more complicated when a business buys SUVs, combi vans or car-derived vans, which appear like a car.

 

VAT restriction on car related expenses

 

The block on VAT recovery does not just apply to the VAT incurred on the purchase of a car. It also includes the cost of any accessories purchased at the same time of the car, even if these accessories are separately itemised on the sales invoice. However, if any accessories are purchased at a later date, the VAT restriction will not apply, and any VAT incurred is recoverable according to the normal rules.

In the following limited circumstances, VAT on the purchase of a car can be recovered.

 

  • The car has been purchased exclusively for business purposes.
  • The car has been purchased for the trade such as a driving school, use as a taxi etc.

 

In order to satisfy “exclusive business” only use, the business must make sure that the car is unavailable for non-business or private use by any employee of the business.

 

Some businesses buy cars to be used as a pool car. HMRC should accept that the pool car will not be available for private use, if all of the following three conditions are met:

 

  1. usually kept at the principal place of business;
  2. not allocated to an individual; and
  3. not kept at an employees home.

 

It is extremely difficult for a sole proprietor or partner to purchase a car which does not have the potential for private use.

 

If you have questions on any of the above, or to find out how our specialist VAT team can help you make sense of these rules and save you time and give you peace of mind, get in touch today: support@garbutt-elliott.co.uk