The input tax on the purchase, acquisition, or importation of a motor car is generally blocked. The blocking order is outlined in SI 1992/3222 VAT (Input Tax) Order 1992.
The term ‘qualifying car’ is widely misunderstood; not least by car dealers who often tell potential purchasers that it means the car qualifies for VAT recovery.
A car is a qualifying car when it has not been subject to the input tax block and therefore VAT is charged on its sale. The block does not apply to a car to be used for one of the following purposes:
- as stock in trade of a motor manufacturer or dealer;
- primarily for the purposes of taxi hire; self drive hire or driving instruction, or
- exclusively for a business purpose and not made available for any private use.
The three relevant purposes can be seen as offering three distinct routes for the recovery of input tax on cars. Thus traders engaged in taxi hire, self drive hire or driving instruction need only demonstrate that the car will be used primarily for the purposes of their business, whereas most other traders (apart from dealers and manufacturers) will need to demonstrate exclusive business use and non-availability for private use.
HMRC are strict in their interpretation of the condition “used exclusively for a business purpose” and take the view that a car bought by a business is available for private use unless positive steps are taken to insulate the car from the possibility of such use. It is particularly difficult to convince HMRC if a business is run from home and the car is kept there, but if it is genuinely the case that the car is only for business journeys and the client uses other vehicles for all private use, this should not prevent them from recovering the input tax. Obviously, the more steps that are taken to demonstrate business use only, the stronger the client’s case will be.
In order to demonstrate that the car is not available for private use, steps that could be taken include:
- business use only clause for insurance purposes;
- detailed mileage logs linking each journey to a business purpose;
- the vehicle not to be allocated to any individual (pool cars);
- garaging overnight at the business premises where this is not the home address, and
- including in employment contracts a clause making it a disciplinary offence to use the car for anything other than a business journey.
Where input tax has been recoverable on the purchase of a car, the eventual sale of the car will be subject to standard rate VAT. Where input tax has been incurred but blocked on the purchase, the sale is exempt.
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