Cars purchased for commercial purposes
Many businesses will wish to purchase cars to be used for their business specifically by their employees to undertake various tasks of that business. This occurs for such business as minicab firms, but also firms that operate out in the field such as sales companies and contract cleaning companies.
Accordingly when cars are purchased by an employer in this manner they will wish to know whether any VAT (Value Added Tax) can be claimed back on the purchase of these cars.
Are you purchasing a car?
The first thing which will need to be established is whether the vehicle that is being purchased is in fact a car. This may seem a strange question to be answering but it is a necessary one as there is a different criterion which is attached to the purpose of purchasing commercial vehicles rather than cars. Factors which will be taken into account include the minimum weights of the vehicles and the availability of glazed and roofed accommodation behind the driver.
Should I always check whether something I purchase is a commercial vehicle?
It is always worthwhile checking whether something you have purchased is in fact a commercial vehicle. Certain vehicles which are viewed as commercial vehicles may fall within the definition of a car for VAT purposes so it is always worth checking the specification prior to purchase.
Is VAT always required to be paid on the purchase of a new car?
VAT will always be payable on the purchase of a new car in the UK or one which has been imported into the UK from overseas.
Is there any way in which I can claim VAT back for cars purchased for business purposes?
Once a vehicle is established as being a car the key question an individual running a business is required to answer is whether they can in fact claim back VAT on that car.
In what circumstances can I claim back VAT on my purchase?
Following the assumption that the individual purchasing the car is registered for VAT and ordinarily entitled to recover VAT in other costs the VAT incurred on the purchase of car and any fitted accessories for that car can only be recovered if that car is used exclusively for business purposes.
When will a car be used exclusively for business purposes?
A car will be used exclusively for business purposes when it is not used for private use at all. As a consequence of this it will be difficult for the purchaser to prove that the car is used solely for business purposes as many cars provided to staff to be used to undertake their job will also be used by that member of staff in their day to day lives outside of work as private use. If there is any private use at all no VAT at all can be recovered on the purchase of the car.
If I try to claim VAT on the purchase of car for business purposes is this likely to be challenged?
All claims to be refunded VAT on the purchases of cars are likely to be challenged by Customs and Excise on principle. The reason for this is regardless of a specific regulated policy put in place by an employer there is always likely to be some form of personal use. For example for the purpose of establishing personal use Customs and Excise will view an employee keeping a fleet car at home overnight personal use regardless of whether the employee actually uses the car for any other purpose than business.
Can VAT be claimed back for any other expenses in relation to the use of fleet cars?
Other than fuel restrictions do not apply for the claiming back of VAT of any other expenses incurred during the use of fleet cars such as repairs, maintenance or aftermarket additions. However, the expenditure incurred for any of these expenses must be met by the business and must also have a business use.
What is the position in relation to fuel?
Where the purchase of fuel is concerned the VAT recovery system is again set up to prevent claims being made for fuel purchased for private use. Therefore if a business provides employees with fuel for private journeys VAT recovery on the fuel for the private journeys can be blocked by the company and charged to the employee.
Cars purchased for private purposes
Will I be charged VAT on a car purchased for private purposes?
As stated before if a new car is bought by an individual for private purposes VAT will be required to be paid and there will be no way to recover this by the individual.
Is this the case when I purchase a used car?
Often individuals will not be able to afford to purchase a new car and so will opt to purchase a used car from a used car dealer. VAT is still required to be paid on a used car however; this will depend on the way it has been calculated by the car dealer.
Accordingly there are two ways in which used car dealers are able to handle VAT on used cars. Some will charge VAT only on the profit which is made on the sale of the car by the dealer. This system is called second-hand margin and is the scheme used by most car dealers.
On the other had dealers can charge VAT on the total transaction cost – i.e. the total price which the car is sold for second hand.
How will a dealer choice which method to employ?
Which system the dealer uses will depend on that particular dealer and the amount of paperwork they will wish to do. For example the second-hand margin scheme requires the dealer to file more paperwork as he must keep certain documents such as the car’s engine number.
Who is the dealer required to inform of which system he is using?
Each dealer is required to inform Customs and Excise of which system he is using in order for it to be legal. However, there is no obligation for the dealer to make the customer aware of which method is being used at the outset. Furthermore, there is no legal right for the customer to know or to be told how much of the price they are paying is made up of VAT.