Commercial Vehicles and VAT Recovery

In many cases, it is easy to identify a commercial vehicle, such as an HGV, transit-type van or a coach.

However, there are 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. Commercial vehicles suitable for private use include motor caravans, motorcycles and double 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 may have been taken out and a new floor panel 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 has produced a list of car-derived vans and vans with rear seats (combi vans) and dual-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 only has 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 vehicles 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 carries out an inspection, it will check the VAT recovery on commercial vehicles. If HMRC sees a dual-purpose vehicle has been purchased and the VAT reclaimed in full, it will check to see the level of private use, if any.

HMRC typically takes 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 sometimes 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 recover,y and HMRC accepts this. If the only private use is the occasional trip to a DIY store or to the local shop for a paper, then the business can recover the VAT in full.

Practical Tip

If a business is buying a commercial vehicle for its business use, it 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 or an output tax charge for the private use if the VAT has been recovered in full.