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Motor Cars

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A motor car for VAT purposes is any vehicle with 3 wheels or more used on a public road.

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The following are not cars for VAT purposes:

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• Vehicles that carry only one person

• Vehicles that can carry 12 or more people

• Caravans, ambulances, Herses  etc. 

• Vehicles with unladen weight of more than 3 tonnes

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VAT Recovery on Cars

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The recovery of VAT incurred on the purchase of a new motor car is only possible in the following circumstances:

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• Car produced by the manufacturer where the intention is to sell it within 12 Months of production

• A new car purchased, imported (including VAT) by a dealer who intends to sell it within the next 12 months

• A new car purchased and intended to be used as a Taxi, Driving instruction car or a car purchased to be hired out. 

• A new car purchased to be used within a business with absolutely no private use.

• A new car purchased to be used as a pool car where it is not allocated to a specific individual, not kept at an employees home but rather the firms normal place of business.

• A new car purchased to be leased internally within a company (provided the car is leased at arms length where the charges would be the same if the car was leased externally) 

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Note:  If you change the use of the car such as no longer using the car to provide taxi services, then a self supply will occur and you will have to account for output VAT on the current market value of the car.

 

Also second hand cars are not included above and there is no VAT recovery available.

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Leased Cars and VAT

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• Leasing companies can recover 100% of the VAT on cars they lease at the commercial rate.  Their invoices to the lessee must state whether the car is a qualifying car which they will use as evidence to recover VAT.

• Cars leased (qualifying cars) by businesses can only recover 50% of the VAT from HMRC on the lease rental charges.  Recovery here is restricted to take into account the private use element of cars) .  Provided they are separately itemised from the charges for leasing the car, VAT on maintenance charges can still be recovered in full 100%.  

• Input VAT incured on Cars leased (qualifying cars) for Driving Instruction or Taxi services can be recovered in full (100%) from HMRC.

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Hire Cars

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• Businesses that hire cars to operate in their business can recover the VAT in full (100%) provided that the car is hired for no more than 10 days.

• Where the period extends beyond 10 days, then only 50% of the input VAT can be recovered,  unless the driver can prove their was not private use.

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Early Termination Charges

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• If the lease rental agreement is terminated early. it is customary for leasing companies to charge you VAT on this as termination payments are considered by HMRC as additional consideration for the supply of the lease.

• Only 50% of the VAT on lease termination payments is recoverable in full from HMRC.

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VAT Recovery on Motor Expenses 

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The VAT incurred on the following motor expenses is recoverable.

• Repairs and Maintenance 

• Other motoring expenses incurred where the car is used solely for business purposes

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Private Use of Business Owned Motor Vehicles

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Where businesses have purchased motor cars and have been able to recover the input VAT incurred in full from HMRC on the basis that the cars are purchased by dealers, used for driving instruction, taxi services or leased out etc, then any change in use from the intended use to private use will trigger an output tax charge payable to HMRC. 

 

See below links for more information as to how this output VAT should be determined.

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Agreement with the British Vehicle Rental and Leasing Association

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Agreement with the Society of Motor Manufacturers and Traders

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Employees using Business Owned Motor Vehicles

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Were businesses charge employees for using its cars for private use, output VAT will become payable on the amount

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Selling a Motor Car

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Input VAT recovered in full on original purchase

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When a motor vehicle is sold, where Input VAT incurred on the original purchase was fully recovered from HMRC (for example a car purchased for Taxi Services or Driving School Services) , an output VAT charge will be triggered:

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• 20% VAT should be applied to the value of the car being sold

• A VAT invoice should be generated and provided to a VAT registered business where requested.

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No input VAT recovered on original purchase

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Where Input VAT has been fully blocked on the original purchase of a car because it was used wholly for private purposes, then: 

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• The sale of the car is exempt  from VAT

• Input VAT charged on services incurred as a result of the sale will be exempt.

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Using the Margin Scheme

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Where input VAT was not billed or applied on the original purchase of a car by a business, the business can use the margin scheme when onward selling the car. (Also applies to commercial vehicles)

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The margin scheme works by deducting the Purchase price of the car from the selling price of the car to arrive at the gross margin and then multiplying by 1/6 to arrive at the VAT to charge on the sale.

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There a number of conditions that are required to be met before a business can use the margin scheme and are detailed in the attached HMRC link.

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Using the VAT margin scheme for second-hand vehicles.

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-Contains public sector information licensed under the Open Government Licence v3.0.

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