Cars purchased for commercial purposes
It is common for businesses to purchase cars for use by their employees to undertake various tasks of that business. This includes, for instance, minicab firms, and firms that operate out in the field such as sales companies and contract cleaning companies.
When cars are bought by an employer for use by their employees, it is important to know in what circumstances they can claim back Value Added Tax (VAT) on the purchase of these cars.
Are you purchasing a car or another commercial vehicle?
There is a distinction between cars and other commercial vehicles for the purposes of VAT, so you will need to establish what category the vehicle falls into. 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.
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 – particularly if the VAT cost is a key factor for you.
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.
When can I claim back VAT on my car purchase?
If you are registered for VAT and ordinarily entitled to recover VAT, you can claim back the VAT costs incurred on the purchase of the car, together with any fitted accessories for that car. However, the car must be used exclusively for business purposes, ie. a genuine pool car for use by employees specifically for business purposes.
You may also be able to claim back all the VAT on a new car if it’s mainly used:
- as a taxi;
- for driving instruction;
- for self-drive hire.
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 (except in the course of a commercial leasing or rental operation). This includes travel to and from home (unless it’s a temporary place of work). You must be able to show that it is only for business use, for instance, by reference to the employee’s employment contract. This is quite a restrictive test to satisfy.
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 HMRC on principle, because there is the likelihood of there being some form of personal use – meaning VAT cannot be reclaimed.
Can VAT be claimed back for any other expenses?
You can claim the VAT back on fuel only if the car is exclusively used for business. If the car is used for both business and personal use, the VAT cannot be claimed back. There are different ways in which to reclaim the VAT on fuel (seek specialist advice on the best way for your business to claim it back).
You can claim for other expenses such as repairs, maintenance and off street parking; however, the expenditure incurred for any of these expenses must be met by the business and must also have a business use.
Cars purchased for private purposes
Will I be charged VAT on a car purchased for private purposes?
If a new car is bought by an individual for private purposes, VAT will be charged. You cannot claim this back as a private individual.
Is this the case when I purchase a used car?
If you buy a used car from a commercial car dealer, VAT is still required to be paid – but this will depend on the way it has been calculated by the car dealer. Most car dealers charge VAT on the profit they make from the sale (the second-hand margin scheme). Others prefer to charge on the total transaction cost. It depends how they keep their records.
How will a dealer choose which method to employ?
Which system the dealer uses depends on the dealer and the amount of paperwork they will be happy to handle. For example, the second-hand margin scheme requires dealers to file more paperwork as they must keep certain documents such as the car’s engine number.
Must the dealer inform anyone of which VAT system it is using?
Car dealers must inform HMRC which system is being utilised to calculate VAT, 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.
If you are buying a second hand car, ask the dealer how they calculate VAT on sale. Just be aware you do not have the right to be told.