VAT in relation to motor vehicles has always been a complex area and we continue to receive queries from clients, perhaps due to the increasing demand for electric vehicles and businesses offering vehicles as part of a salary sacrifice arrangement. The aim of this article is to summarise some of the key considerations to be aware of.

What is a car?

A car for VAT purposes is deemed to be any motor vehicle normally used on public roads which:

• Has three or more wheels;
• Is either constructed or adapted mainly for carrying passengers; or
• Has roofed accommodation to the rear of the driver’s seat that is fitted with side windows or has been constructed or adapted for the fitting of side windows.

For the avoidance of doubt, electric cars fall within this definition.

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 self-drive hire.
• The car is to be used exclusively for the purposes of your business 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.

Cars provided under salary sacrifice

A common query from clients is in relation to the leasing of an electric car and providing it to an employee under a salary sacrifice arrangement.

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.

So, where a car is provided to an employee under salary sacrifice, this is deemed to be a taxable supply by the company to the employee and output VAT will need to be accounted on the amount of salary being sacrificed.

However, it should be noted, that the amount of the salary being sacrificed must be equal to the market value of what the employee would pay if they were leasing it directly. In this case, the business is able to recover the VAT in full on the lease costs, on the basis that the car is being used exclusively for business purposes.

VAT on fuel

When it comes to VAT on fuel, there are essentially three options available. The first option is to simply not claim any VAT at all. This is the simplest option and may make sense if there is very little fuel being purchased.

The second option is to keep a detailed mileage record identifying the business and non-business mileage. You could then recover the VAT in relation to the business mileage. This is the most accurate method but also brings the biggest admin burden.

The third option is to claim VAT on all of the fuel purchased but then pay a fuel scale charge. The scale charges are set amounts based on the CO2 emissions of the cars, and are designed to account for the personal usage of the fuel.

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.

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 is currently 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. HMRC should hopefully clarify the position here in due course.

Summary

The above is a simple run through of some of the rules in place when it comes to VAT on motor vehicles. If you have any queries regarding VAT on cars, then please do not hesitate to reach out to, Stephen Patey, VAT Senior Manager, or a member of our VAT team.