Value Added Tax usually applies to all purchases of new company cars and vans

If your company buys new cars or vans for use in your business then Value Added Tax ('VAT') is normally applied to the purchase price, but there are restrictions on recovering the VAT.

Company Cars

When you buy a company car the car is normally assumed to have a 'dual purpose'. In other words, they are typically used for business travel and for personal travel by the drivers.

This dual purpose means that there are restrictions on the VAT that can be recovered.

As a result, unless a company car is a 'pool' car (broadly, a pool car is used only for business purposes and kept at the company premises), then VAT on the purchase price cannot be recovered by your business.

However, this also means that your business doesn't normally need to charge VAT when is sells a company car at the end of its replacement cycle.

Leased Cars

Complications arise when you lease a company car. You will normally be charged VAT on the lease rentals from the leasing company.

However, unlike purchases of cars, because of this dual purpose, there is a limit of 50% VAT recovery on the car's lease rentals.

The limit of 50% on VAT recovery is to take account of the deemed 'dual use' of the car in your business.

The only exception is for VAT recovery for pool cars. For a pool car, 100% of the VAT can be recovered.

Company Vans

If your company buys or leases vans for use in the business then VAT can normally be recovered in full (100%) on either the purchase price or the lease rentals.

However, when you sell the van you will need to charge VAT on the sale price and account for it in the normal way.

There are special rules defining what is and what is not a van for VAT recovery purposes. Typically a van is a vehicle that is made predominantly for the carriage of goods.

However, 'cross-over' vehicles may complicate the VAT position. Typically this is for pick-up trucks which have seats behind the driver, such as 'double-cab' pickups.

Double-cab pick-up trucks are now treated as a company car for employee income tax purposes, but the VAT on the cost (or lease) of the vehicle can usually be recovered as long as the vehicle has a payload of 1 tonne or more.

Running Costs

Generally, VAT charged on the day-to-day running costs for company cars and vans (e.g. maintenance and fuel costs) can be recovered by eligible VAT registered businesses.

However, there is an exception to this in the case of electric cars where they are used for business purposes. Records should be maintained to demonstrate the scope and extent of business use of the electricity used for business purposes.

Private Fuel

If your business is VAT registered and provides its company car or van drivers with free fuel for private motoring then you will need to charge VAT on this benefit to the drivers.

Rather than actually charging the VAT to the driver, the VAT due is collected from your business.

You pay a fixed amount of VAT to HM Revenue and Customs at the end of each VAT period (monthly, quarterly or annually) for each car provided with free private fuel during that VAT accounting period.

HM Revenue & Customs

We've included links to the relevant HM Revenue & Customs web pages for more information on pick-up trucks and VAT on company cars and vans.