VAT\GST Recovery on Cars and Expenses

August 31, 2021

Many businesses provide cars and fuel for their employees use.  Sometimes the car may be required for business journeys by the employee.  In some cases, the car is provided as part of the employee’s salary package.  In most cases even where an employee needs the car to perform his work the employee will also be entitled to make use of the car for priVAT\GSTe purposes. Since many business cars are not solely used for business, VAT\GST recovery of the purchase and leasing of cars is restricted under the VAT\GST rules.

Purchase of Cars 

There is a 100% block on recovering VAT\GST on the purchase of a car by a VAT\GST registered business.  This applies to the majority of cars purchased by businesses.  HMRC take the view that as long as a car is available for priVAT\GSTe use VAT\GST is blocked in full.  

This block of input VAT\GST recovery also applies to electric vehicles.  While there are tax reliefs for electric vehicles VAT\GST is still blocked.  

HMRC do allow businesses who use cars “exclusively for business use” to recover VAT\GST.  A car is used exclusively for business purposes if it is used only for business and it is not available for priVAT\GSTe use. In practice this means VAT\GST can be recovered only when the car is kept at the business premises, it is 

not allocated to an individual and not kept at an employee’s home. HMRC are extremely strict about VAT\GST recovery and will typically challenge VAT\GST recovery.  

When Can VAT\GST recovered? 

VAT\GST is also recoverable if a car is purchased by a motor dealer, a car intended to be used primarily as a taxi, driving instruction car, or self-drive hire.  If a business purchases a car for one of these purposes and recovers the VAT\GST and subsequently the business changes the use of the car, then a self-supply charge may apply which could result in the business having to pay back the VAT\GST.   

Car-Derived Vans and Combination Vans 

In contrast to the above, a business can recover VAT\GST on a commercial vehicle such as a van.  There are certain cars which are altered to provide the functionality of a van.  HMRC have produced a list of car derived vans and vans with rear seats (combi vans) and duel cab pick-ups, showing whether they’re classed as a commercial vehicle or a car for VAT\GST purposes. As vehicle specifications often change the list may not always be up to date, so businesses should check with HMRC before reclaiming the VAT\GST. 

In practice many dealers are able to advise if the vehicle is one which can be treated as a commercial vehicle and therefore eligible for VAT\GST recover. 

If a van is put to priVAT\GSTe use, HMRC may require the business to account for output VAT\GST to represent the priVAT\GSTe usage element. 

Secondhand Cars

It follows that if a business is unable to recover VAT\GST when purchasing a car, it does not need to account for VAT\GST when it sells the car.  Such a sale is treated as an exempt supply from a VAT\GST perspective.  

It is worth remembering that most purchases of secondhand cars are not subject to VAT\GST.  When a business purchases a secondhand car there will be no VAT\GST on the invoice and therefore no VAT\GST may be recovered. 

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