“My client is considering replacing the cars used by the employees of his company, including the directors. I understand that a friend at his golf club has advised him that if the company buys electric cars the VAT incurred on the purchase will be recoverable as input tax. Is this right?”
A. We get this question a lot on the Croner Taxwise VAT Advice Line. There is no difference in the VAT recovery position for the purchase, or indeed the lease, of electric, diesel or petrol fuelled vehicles.
For most businesses input tax recovery on the purchase of a car is blocked; there are however a few exceptions.
VAT incurred on the purchase of a car is only recoverable in the following limited circumstances:-
- Where the car will be used exclusively for a business purpose i.e. is to be used only for business journeys and not available for private use of employees or anyone else.
- On the purchase of a qualifying car intended to be used primarily as a taxi, driving instruction car, or self-drive hire car
- Where the car is a stock in trade of a motor manufacturer or dealer
Further details on the above points can be found in Section 3 of VAT Notice700/64 Motoring Expenses.
There is a common misconception of the phrase ‘qualifying car’, even among some car dealers, as we have heard anecdotally. A qualifying car is a car that has not been subject to the full input tax block; not a car that qualifies for input tax recovery. HMRC consider that a car is available for private use “when there is nothing preventing you or your employee from using the car for private use.” The fact that a car is bought for the purpose of a business is not the only requirement; the business needs to have taken steps to ensure that the car is not made available to anyone for private use, and there is significant case law on this matter.
Where a business leases a qualifying car, 50% of the VAT on the leasing charge is blocked (and therefore irrecoverable) to cover private use of the vehicle. The limited circumstance detailed above, i.e. exclusive business purpose, stock in trade, qualifying taxi/self-drive hire use etc. apply in the same way to leased cars as to the purchase of a car, and where these apply, VAT is recoverable in full on the leasing charge, subject to the normal rules.
Where a separate charge is made for the maintenance of the leased vehicle, the VAT on that element is not included in the 50% block, and is therefore recoverable in full.
For completeness, the definition of a car for VAT purposes from section 2.1 of the Notice is reproduced below-
“A car for VAT purposes is any motor vehicle of a kind normally used on public roads which has 3 or more wheels and either:
- is constructed or adapted mainly for carrying passengers
- has to the rear of driver’s seat roofed accommodation which is fitted with side windows or which is constructed or adapted for the fitting of side windows
Section 2.2 however advises that the following exceptions are not cars for VAT purposes:
- 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 not less than 3 tonnes unladen weight
- special purpose vehicles, such as ice cream vans, mobile shops, hearses, bullion vans, and breakdown and recovery vehicles
- vehicles with a payload of one tonne or more
NB. The payload exception is the one that allows double cab pick-ups meeting that condition to be treated as commercial vehicles for VAT purposes rather than cars.