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15 September 2019

Cars and tax… and why electric might be your best option

Frequently Asked Business Question:

I am considering changing my car which I use in my business and am confused about the term “VAT qualifying” does this mean I can recover the VAT on the purchase of the car? Does it differ if the car is electric?

Top Tip:

The terminology “VAT qualifying” is very confusing and unfortunately is often used unscrupulously by car dealers and salesmen to entice customers to purchase a car on the grounds that they will be able to recover the VAT incurred in the purchase. This, of course, is generally not the case because the recovery of input VAT on the purchase acquisition or importation of a car is generally blocked via the Input VAT Order 1982. However, if a car has not been subject to the input VAT block, VAT is therefore charged on its sale. The block doesn’t apply to any car used generally for one of the following three purposes:

  • By a motor manufacturer or dealer as stock in trade;
  • Exclusively for business purposes without any private use whatsoever; and
  • Used by a driving instructor, taxi driver or hired as a self-drive vehicle.

The taxi driver, driving instructor or trader operating a self drive business only needs to show that the vehicle will be mainly or primarily used for the purpose of their business however, the trader seeking to recover input VAT on the grounds that the car will be exclusively used for business purposes without any private use, faces an uphill battle. The onus of proof is on the trader who is claiming exclusive business use to show that there is absolutely no private use associated with the car and this is obviously best served by the trader having at his or her own private vehicle for private journeys. HMRC will also be suspicious of exclusion business vehicles being garaged at the trader’s dwelling house however notwithstanding all of this it is possible to recover VAT on a vehicle that is exclusively used however the onus of proof is on the taxpayer.

Strong arguments indicating exclusive business use would be as follows:

  • A detailed mileage log is kept with the vehicle showing the business journeys taken by the vehicle
  • The insurance policy for the car includes business only use with no personal or private use permitted
  • The car is kept at the business premises and is available to any individual such cars are often described as pool cars

In summary therefore if you are able to demonstrate that the vehicle is exclusively use a business purposes it is possible to recover the input tax however it should be remembered that once the VAT is recovered it should be charged on the ultimate sale of the vehicle.

If you want to seriously reduce the cost of business Motoring for yourself or your employees, you should consider purchasing an Electric Vehicle.

Although VAT recovery rules for Electric Vehicles are the same as for Petrol / Diesel Vehicles, over a four year period an employee will typically save between £3,000 and £5,000 in income tax. The employer will not pay any Vehicle Excise Duty on car purchase and they will also be able to write the entire cost of the car off against profits by claiming 100% capital allowances on the car.

The advice above is specific to the facts surrounding the questions posed. Neither FPM nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.
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