VAT and company cars are rarely top of the agenda; until something changes.
For many businesses, that “something” is the growing use of salary sacrifice arrangements, particularly as electric vehicles become a more common part of employee reward packages. What often starts as a straightforward benefits decision can quickly raise unexpected VAT questions, especially where leasing, fuel, charging and employee contributions intersect.
We’re increasingly seeing businesses unsure whether they are:
- Recovering too much or too little VAT on leased vehicles
- Correctly accounting for output VAT under salary sacrifice arrangements
- Applying the right approach to fuel, electric vehicle charging and private use
These are easy areas to get wrong and mistakes can sit quietly in the background until picked up by HMRC.
If you’re reviewing your fleet arrangements, introducing salary sacrifice for the first time, or simply want reassurance that your current VAT treatment is robust, an early conversation with our VAT team can help prevent issues building over time.
Below, we set out a practical overview of the VAT rules on cars, starting with salary sacrifice arrangements and then covering other common VAT pitfalls businesses encounter when purchasing, leasing or running company vehicles.
Cars provided under salary sacrifice
When something is being provided under a salary sacrifice arrangement, the amount of salary being sacrificed is deemed to be consideration for the goods or services being provided under the arrangement. As a result, output VAT is usually due on the amount of the salary being sacrificed.
Where cars are provided under salary sacrifice, there are two common areas where VAT errors can arise:
- Restricting some or all of the VAT on lease costs (in line with the rules set out below), and accounting for output VAT on the salary sacrifice; or
- Recovering VAT in full on the lease costs, but not accounting for VAT on the salary sacrifice amount.
If you provide cars to employees under a salary sacrifice arrangement it is important to review your current VAT treatment and processes to ensure you are accounting for the VAT correctly.
Other common VAT issues
Purchasing a car
As a general rule, VAT cannot be recovered on the purchase of a car. There are three main exceptions to this:
- The car is a stock in trade of a motor manufacturer or dealer.
- The car is intended to be used primarily as a taxi, as a driving instruction car, or for self-drive hire.
- The car is to be used exclusively for business purposes and is not made available for private use.
It is this final category where issues generally arise. A business could take a view that a car is only used for business purposes, however this is very difficult to support – for the car to be deemed to be used exclusively for business purposes, it must never be available for private use. Private use includes travel from home to the office, so a car would only be excluded from private use if it was a pool car which is being kept at the principal place of business address and is not allocated to an individual.
Therefore, in most cases, when a business is purchasing a company car, the starting point is that any VAT incurred on the purchase is not recoverable.
Lease of a car
If you are leasing a car for business purposes, you are entitled to recover 50% of the VAT incurred on the lease of the car.
However, you should be aware that if you lease a car which is to be used exclusively for business purposes, the entirety of the VAT incurred on the lease will be recoverable.
Where the car is purchased under a hire purchase agreement, VAT will be blocked in full since a hire purchase is not a lease agreement.
VAT on fuel
There are three main approaches available when it comes to VAT on fuel:
- Claim no VAT at all
This is the simplest option and may be appropriate where fuel costs are low. - Maintain detailed mileage records
By identifying business and non-business mileage, VAT can be recovered on the business element only. This is the most accurate approach but comes with a higher administrative burden. - Recover VAT on all fuel and apply a fuel scale charge
Fuel scale charges are fixed amounts based on CO₂ emissions and are designed to account for private fuel usage.
Each option has different compliance and administrative implications, and the most appropriate choice will depend on the size and structure of your fleet.
Charging of electric vehicles
In 2023, HMRC released a brief to confirm that supplies of electric vehicle charging at charging points in public places are subject to the standard rate of VAT and not subject to any zero rate reliefs. However, reports do indicate that this will be cut to the 5% reduced rate in the future.
HMRC has also confirmed that input VAT incurred in respect of charging electric vehicles can be recovered if the vehicle is used for business purposes. In much the same way as petrol usage, a record must be kept of the business and private mileage of the vehicle, with only the business usage allowing input VAT recovery.
HMRC indicated that it was considering the situation with regards to employees being reimbursed by employers for the cost of electricity used in charging electric cars at home. The issue here is that the electricity is being supplied to the employees and not the employer. Essentially, this does not allow the employer to recover the VAT incurred, even though they are reimbursing the employee. No clarification has been given on this area, so adopting an approach where some form of apportionment is applied would be the recommended course of action.
Summary
VAT on motor vehicles is an area where small misunderstandings can quickly lead to disproportionate risk, particularly as fleet arrangements evolve and electric vehicles become more prevalent.
If you would like to sense-check your current VAT treatment, whether around salary sacrifice schemes, leasing arrangements, fuel recovery or electric vehicle charging, our VAT team can help you take a clear, practical and proportionate approach.
To discuss your specific circumstances, please contact Stephen Patey, VAT Senior Manager, or speak to a member of HaysMac’s VAT team for tailored advice.
