Andrew Needham looks at what counts as a commercial vehicle, and the VAT recovery position.
Commercial vehicles
In many cases, it is easy to identify a commercial vehicle, such as an HGV, transit type van or a coach. However, there some vehicles that are classified as commercial vehicles (defined as having a payload of over one tonne, or an unladen weight of three tonnes) but have a dual purpose and are held out for sale as ‘lifestyle’ vehicles that can also have a private use. These vehicles are car-derived vans and vans with rear seats - combination or combi vans and dual cabs.
Dual purpose vehicles
Car derived vans are based on cars and look similar to cars on the outside. However, either the manufacturer or a vehicle converter has altered the inside of the vehicle so that it's sold as a commercial vehicle. For example, the rear seats and seat belts will have been taken out and a new floor panel will have been fitted in the back to make a load area. HMRC considers that a car derived van is a commercial vehicle if it meets certain conditions.
HMRC have produced a list of car derived vans and vans with rear seats (combi vans) and duel cab pick-ups, showing whether they're classed as a commercial vehicle or a car for VAT purposes. As vehicle specifications often change the list may not always be up to date, so businesses should check with HMRC before reclaiming the VAT.
Reclaiming the VAT
VAT registered businesses can generally reclaim the VAT when they buy a commercial vehicle as it clearly has only a business use.
Where a vehicle has only got a business use a VAT registered business can recover all the VAT on its purchase. Generally, HMRC views any incidental private use of most types of commercial vehicle as ‘de minimis’ and would not restrict input tax in that case.
HMRC says that the intended use of commercial vehicles that are suitable for private use must be considered. In cases where the private use is more than ‘de minimis’ it would be necessary to:
- apportion the tax on the purchase and only claim the element relating to the business use; or
- recover the input tax in full and account for output tax each period under the Lennartz principle – i.e. based on the private use element.
VAT inspections
When HMRC carry out an inspection they will check the VAT recovery on commercial vehicles and if they see a dual purpose vehicle has been purchased and the VAT reclaimed in full they will check to see the level of private use – if any.
Insignificant private use? HMRC typically take an aggressive stance when dealing with dual purpose vehicles and will look to disallow all or part of the VAT if it has been reclaimed in full. HMRC will sometime ask if there is a direct tax ‘benefit-in-kind’ charge and if so argue that the VAT cannot be recovered in full.
However, if there is any private use a benefit-in-kind is due but for VAT purposes if the private use is insignificant then there is no need to restrict the VAT recovery. If the only private use is the occasional trip to a DIY store or to the local shop for a paper, then you can recover the VAT in full.
Practical Tip :
If you are buying a commercial vehicle for your business you can normally reclaim the VAT in full. However, if the vehicle has a dual purpose and there is significant private use, there will be a restriction on the input tax that can be reclaimed.
