When a company purchases a car, the ability to reclaim VAT largely depends on two factors: the method of Purchase and the intended use of the vehicle. There are generally three methods of acquiring a company car:

• Purchased Outright
• Hire Purchase (HP)
• Personal Contract Purchase (PCP)

Let’s delve into each method and its implications for VAT reclaim.

Purchased Outright

The general rule is that VAT is not recoverable when a company buys a car outright. HMRC implements this restriction to prevent personal usage benefits from being claimed under company expenses. It’s important to note that this rule applies equally to electric cars despite a common misconception that they receive more favourable VAT treatment.

Hire Purchase (HP)

Hire Purchase is essentially equivalent to using loaned funds to purchase a car outright. From a VAT perspective, the vehicle is treated as purchased from the start of the agreement. Consequently, similar to outright purchases, VAT is blocked 100% and cannot be reclaimed.

Personal Contract Purchase (PCP)

PCP agreements present a more complex scenario, as they can be classified either as a lease or a purchase, depending on the terms:

As a Purchase: If the balloon payment (final payment) at the end of the agreement is set below the anticipated market value, the car is treated as purchased, blocking VAT recovery.

As a Lease: If the balloon payment matches or exceeds the expected market value, 50% of the VAT is recoverable. This is because the car is considered under lease terms, where VAT applies only to the monthly repayments.

Understanding Balloon Payments

A balloon payment is the final sum paid at the end of a finance agreement to own a vehicle. As discussed above, the classification of this payment significantly affects VAT treatment.

VAT Reclaim on Electric Vehicles

For electric cars, the rules for VAT recovery align with those of conventional vehicles. However, electric vehicles come with the added advantage of various government incentives designed to promote cleaner energy use. While the VAT is still non-recoverable if the electric vehicle is purchased outright or through a Hire Purchase agreement, leasing an electric vehicle allows the business to benefit from the 50% reclaim on VAT for lease payments. Additionally, businesses can leverage other tax benefits, such as reduced Benefit in Kind (BiK) rates and grants available for electric vehicles, enhancing the overall cost-efficiency of choosing an EV.

Special Cases for VAT Reclamation

There are specific scenarios where VAT can be fully reclaimed, regardless of the purchase method. This full recovery applies predominantly to vehicles used exclusively for business purposes, such as:

1. Taxis
2. Cars used by driving instructors
3. Vehicles used for self-drive hire

In these cases, because the vehicle is integral to the business’s primary operations, 100% of the VAT can be reclaimed, reflecting the vehicle’s dedicated business use.

Strategies for Maximising VAT Reclaim

While the general rules may seem restrictive, there are strategies businesses can employ to maximise their VAT reclaim on company cars:

Insure the car for business use only: This provides a strong indicator that the vehicle is intended solely for business use.

Implement strict usage policies: Instruct all potential users of the car that it is to be used for business purposes only. Have employees sign declarations agreeing to this restriction.

Update employment contracts: Include clauses in employment contracts stating that employees agree not to use company cars for private use and to return pool cars to business premises at night.

Maintain detailed records: Keep comprehensive mileage logs for all journeys. Consider including a clause in employment contracts requiring employees to maintain these logs.

Consider board resolutions: Have company directors pass board resolutions restricting vehicle use to business purposes only.

Opt for commercial vehicles: Where possible, use commercial vehicles like vans or car-derived vans, as VAT can typically be reclaimed on these if they’re used for business purposes.

Utilise the Flat Rate Scheme: For businesses eligible for the Flat Rate Scheme, this can simplify VAT accounting and potentially increase the amount of VAT that can be reclaimed.

VAT on Fuel and Staff Travel

Businesses can reclaim VAT on fuel used for business purposes. If the vehicle is used for both personal and business purposes, you can either:

• Reclaim 100% of the VAT and pay the correct fuel scale charge for the vehicle.
• Only reclaim the VAT for fuel used on business trips (accurate records must be kept).

For staff travel, companies can reclaim VAT on employee travel expenses involving the use of a business vehicle. However, VAT cannot be claimed if a flat rate is paid for employees’ expenses.

Recent Legal Developments

Recent tribunal cases have set precedents that may allow for VAT reclaims in situations previously disallowed. The key factor emerging from these cases is the concept of “intent.” If a company can demonstrate that its intent is for the car to be used solely for business purposes, a reclaim of input VAT may be allowed, even if proving absolutely no personal use is difficult. Navigating VAT reclaim on company cars requires a thorough understanding of the rules and careful planning. While the general principle is that VAT cannot be reclaimed on cars purchased for mixed-use, there are exceptions and strategies that businesses can employ to maximise their VAT recovery.

Key takeaways:

1. The method of car acquisition significantly impacts VAT reclaim possibilities.
2. Electric vehicles follow the same VAT rules but offer additional tax benefits.
3. Vehicles used exclusively for business purposes may qualify for full VAT reclaim.
4. Implementing strict policies and maintaining detailed records can support VAT reclaim efforts.
5. Recent legal cases have opened up possibilities for VAT reclaim based on the “intent” of vehicle use.

By integrating these considerations into your broader tax strategy, you can optimise your company’s approach to vehicle acquisition and usage, potentially saving significant amounts in VAT. As always, given the complexity of tax law and its frequent changes, it’s advisable to consult with one of our tax accountant for advice tailored to your specific business circumstances.