Cars for business: VAT issues

Cars for business: VAT issues

In our Autumn 2023 Newsletter, we covered a number of the tax issues associated with business cars, such as capital allowances and employee benefits. As promised, we now highlight some of the key VAT points of which to be aware.

What is a ‘car’ for VAT purposes?

The definition of a car, for VAT, is different to the definitions for capital allowances and employee benefit purposes. It 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; 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, there are some exceptions:

Vehicles capable of accommodating only one person, or suitable for carrying 12 or more people, including the driver;

  •  Caravans, ambulances and prison vans;
  •  Vehicles of at least 3 tonnes unladen weight;
  •  Special purpose vehicles, such as ice cream vans, mobile shops, hearses, bullion vans and breakdown & recovery vehicles;
  •  Vehicles with a payload of one tonne or more.

Recovery of VAT on car purchases Normally, a VAT-registered business cannot recover the VAT on the purchase of a car. However, you may recover VAT in full on a car which:

 

  • is a stock-in-trade of a motor manufacturer or dealer; or
  •  is intended to be used primarily as a taxi, driving instruction car, or for self-drive hire; or
  •  will be used exclusively for the purposes of your business (i.e. there is no intention to make the car available for the private use of anyone); thus, a pool car is eligible for VAT recovery.

Hire purchase v Leasing: VAT comparison example

Suppose a business owner buys a van or car of cash price £20,000 plus VAT (£4,000); ignore finance costs of the agreement for this example.

Hire purchase

Initial invoice will show £20,000 + £4,000 VAT.

  • Van – trader can recover this VAT
    in the VAT period of purchase
  •  Car – the VAT is not recoverable
    (unless e.g. a pool car)
  •  No separate VAT is charged on the
    instalments.

 

Finance lease Each instalment will have VAT charged on it, rather than being all on an initial invoice

  • Van – the VAT is recoverable, unless using the Flat Rate Scheme
  •  Car – 50% of the VAT is recoverable, irrespective of the CO2 emissions of the car [NB This is a special rule for leased vehicles]
  •  Full VAT recovery (subject to the usual partial exemption and business use tests) is available for ongoing maintenance of leased cars.

Motorbikes are not cars, so input VAT is claimable, subject to any adjustments for partial exemption or non-business use.

VAT on electric vehicles

An electric car will still be viewed as a car for VAT purposes so, if there is any private use of the car, VAT is not recoverable on the purchase. The VAT can however be reclaimed if there is no intention to make the car available for private use. If an electric car is leased, where there is any private use of the car, only 50% of the VAT on the leasing charge can be recovered.
Revenue & Customs Brief 7/21 – Electric
vehicles

This gives HMRC’s views on the VAT liability of charging of electric vehicles and the circumstances in which the VAT charged can be recovered as input tax. The reduced rate (5%) that applies to “domestic” supplies of electricity does not apply to charging of vehicles in public places. The standard rate will therefore apply when someone uses a public charging point.

Recovering input tax for charging electric vehicles

You can recover the input tax for charging your electric vehicle if all the following apply:

  • you are a sole proprietor (i.e. self-employed);
  •  you charge your electric vehicle at home or a public charging point;
  •  you charge your electric vehicle for business purposes.

You can recover VAT on only the business use amount, so keep accurate mileage records. The rate for recovery of input tax for charging electric vehicles is the same as the VAT rate charged on the supply of that electricity.

Employees

If employees charge an electric vehicle (which is used for business) at home, they cannot recover the VAT. This is because the supply is made to the employee and not to the business. If employees charge an employer’s electric vehicle (for both business and private use) at the employer’s premises, the employee needs to keep a record of their business and private mileage so that the employer can work out the amounts of business use and private use for the vehicle. The employer can recover VAT on only the business element.
Alternatively, the employer can recover the full amount of VAT for the electricity used to charge the electric vehicle (inc. the electricity for private use). However, they will be liable for an output tax charge to reflect the private use. This is because a ‘deemed supply’ has been made.

ULEZ fees

The Ultra Low Emission Zone (ULEZ) was expanded to all London boroughs on 29 August 2023. From this date, drivers of vehicles that do not meet the emissions standards must pay a daily charge of £12.50 when driving within this area. HMRC has confirmed that self-employed taxpayers are entitled to claim tax relief on LEZ charges, including London’s ULEZ fee. As long as they have been incurred ‘wholly and exclusively for the purposes of the trade’ (i.e. incurred on a journey that was for business purposes).

If you need any help in understanding the VAT issues of cars for your business, please get in touch.

The complete Spring Newsletter can be found here