Kirk Rice Blog

Navigating VAT on Cars: A Comprehensive Guide to Purchasing and UsageWritten on August 23, 2023 by Kirk Rice LLP

Value Added Tax (VAT), although introduced as “the simple tax”, is in reality a complex aspect of taxation that often requires careful consideration. The application of VAT rules on cars can be intricate, with various factors influencing the recoverability of VAT not only on purchase costs but also the running costs. In this article, we will explore the nuances of VAT on car purchase,s, leasing, running costs, fuel, and the specific case of electric cars.

VAT on Car Purchases: Balancing Private and Business Use

The starting point is that the VAT on purchasing a car is blocked from recovery if the vehicle is “available” for private use. However, recent tribunal cases have indicated a slight trend favouring taxpayers when certain conditions are met. Notably, if a car is restricted from private use—such as being returned to company premises overnight and governed by an employment agreement preventing private usage—there might be a chance to recover the VAT on its purchase. However, businesses should exercise caution and consider these conditions thoroughly before reclaiming VAT.

Leasing of Cars: Navigating Input Tax Restrictions

The VAT block on input tax extends to leasing arrangements, including hire purchase and lease purchase agreements. However, long-term hire agreements that do not involve the intention or ability to purchase the car allow for partial recovery (50%) of the VAT on the lease element. In addition, under ten days, short-term leases or hires are generally not subject to the input tax restrictions. However, if a short-term lease replaces an unavailable company car (as the company car is being repaired), the VAT block remains applicable to the input VAT on the short-term lease cost. Businesses engaging in leasing agreements should carefully review contract terms and conditions to optimise VAT recovery.

Running Costs and Repairs: Potential for VAT Recovery

When it comes to servicing and repairing company cars, businesses are often in a more favourable position regarding VAT recovery. The VAT on services and repairs can usually be reclaimed without significant restrictions. VAT recovery on servicing costs of leased cars can be recovered in full, where those servicing costs are itemised separately, irrespective of the VAT recovery treatment on the “leasing” element charge.

Fuel Costs: Diverse Approaches to VAT Recovery

VAT recovery on fuel costs offers businesses several approaches to choose from:

1. No Recovery: Some businesses opt not to recover VAT on fuel costs as the costs are relatively low, and recovering the input VAT may not be cost-effective.
2. Full Recovery with Fuel Scale Charge: Businesses can choose full VAT recovery on all fuel costs for both business and private use but must apply a fuel scale charge (output tax charge). Normally, only businesses with high fuel costs would use this option.
3. Apportionment Method: A mileage log that accurately divides mileage between business and private/non-business use can enable businesses to apportion VAT recovery on fuel costs based on these percentages.

Moreover, businesses that provide a “mileage allowance” to employees can recover VAT on the fuel element of the allowance. This entails multiplying the number of miles by the fuel element and the VAT fraction.

Electric Cars: A Unique Consideration

Electric cars, though almost identical to conventional cars in their VAT aspects, have one distinctive VAT difference in connection with charging costs. In a notable ruling (Business Brief 7/2021), Her Majesty’s Revenue and Customs (HMRC) indicated that sole proprietors could recover VAT on home charging costs, provided they are apportioned for non-business usage. However, if an employee incurs home charging costs, VAT recovery is not applicable. Additionally, businesses that allow employees to use charging points at the workplace must adhere to specific VAT rules and HMRC guidelines.

VAT Treatment of Vans and Pick-Up Trucks

Unlike the intricate VAT regulations surrounding cars, vans and pick-up trucks that do not meet the definition of cars generally allow for full VAT recovery. This presents a distinct advantage for businesses considering these types of vehicles for their operations.

In conclusion, VAT on cars is a multifaceted landscape that requires careful examination of various factors. From purchase restrictions and leasing considerations to running costs, fuel recovery methods, and electric car nuances, businesses must navigate this complex terrain to optimise their VAT recovery while ensuring compliance with tax regulations. As VAT rules can evolve, it’s crucial to stay informed about any updates from tax authorities to make well-informed financial decisions.

If you would like to speak to our VAT advisor, to discuss VAT on cars or any other business VAT issue, please email info@kirkrice.co.uk or call 01344 875 000