Q&A: reclaiming VAT on company cars

Croner VIP Tax Team

In this week’s Q&A, Joshua Hamley-Deane, tax adviser at Croner, explains the differences between recovering input tax on leased and purchased cars for mixed use.

Q. My client plans to acquire a car for business meetings and private use (including commuting). What are the VAT input tax recovery implications for purchasing versus leasing?

A. The VAT recovery position changes significantly between purchasing and leasing when private use is involved.

Purchasing the car

Generally VAT recovery on the purchase of a motor car is wholly blocked.

To recover VAT, the vehicle must be used exclusively for business purposes and not be ‘available for private use’. Because your client intends to use the car for commuting, which means it will be ‘available for private use’, the input tax on the purchase is fully blocked and cannot be recovered.

Leasing the car

If the company leases the car, the ‘block’ can be reduced and partial recovery is possible. A standard 50% block applies to the input VAT on the lease payments (to account for private use).

This means the business can reclaim the remaining 50% of the VAT.

If the lease includes a separately invoiced maintenance charge, the business can typically recover 100% of the VAT on that maintenance element (subject to the normal input tax recovery rules).

If the lease contract is terminated early, these fees are treated as further consideration for the lease, so the 50% block will also apply to them.

Personal contract purchase and hire purchase agreements

If acquiring the vehicle via personal contract purchase (PCP) or hire purchase (HP), further steps must be considered to determine if the agreement is categorised as a supply of goods in the case of the purchase of a car, or as a supply of services for the lease of a car, for VAT purposes.

To determine this, refer to the final option-to-purchase terms set out in HMRC Brief 1 (2019): VAT treatment of Personal Contract Purchases (PCP) , to consider whether the VAT is fully blocked, as a supply of goods, or potentially subject to the 50% block as a supply of services.

With private use involved, purchasing allows for 0% VAT recovery whereas leasing allows a standard 50% recovery on the rental fee and potentially 100% on maintenance. Therefore, leasing can be more advantageous for VAT recovery in this scenario.