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HMRC internal manual

VAT Input Tax

HM Revenue & Customs
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Motoring expenses: exclusive business purpose relating to input tax block and qualifying cars


Definition of exclusive business use

A car is used exclusively for business purposes if it is:

  • used only for business journeys; and
  • it is not available for any private use.

When it buys the car the business must not have any intention to make the car available for the private use of employees or anyone else.

Pool cars

Pool cars are normally used exclusively for business purposes as long as they are:

  • usually kept at the principal place of business;
  • not allocated to an individual; and
  • not kept at an employees home.

Cars bought for sale and lease back

Sometimes a car is bought or imported for the purpose of sale and lease back. It will not be treated as available for private use provided the business pays output tax on the resale to the leasing company. They should do so in the same tax period that they recover the input tax on the purchase.

Cars bought for in house leasing

The block on input tax recovery is only lifted for cars purchased for leasing if it can be shown that the intended lettings are priced as if they were commercial, arms length transactions. This is provided for by the test in paragraph 7(2G) (a) of the VAT (Input Tax) Order 1992.

The commercial arms length test asks the business to charge the market rate for the lease or restrict the input tax. The purpose of the test is to stop businesses getting round the restriction by setting up non-commercial leasing arrangements. These arrangements can sometimes be artificial and will be challenged by HMRC.

The leasing market is highly competitive. In practice a market rate can be determined. Comparative tables of leasing charges can be found on the internet. Alternatively you can compare the price with a commercial quotation. When comparing rental charges you need to be sure that you are comparing like with like. The rental charges will vary depending on the exact car model, length of lease, and annual mileage.

A number of companies have set up separate in-house leasing companies. Although the legislation does not prevent such companies they must obviously ensure that their prices:

  • are not influenced by the relationship with their customer; and
  • are charged at the market rate for their leases.

In cases of in-house leasing it is important to consider whether the agreement between the parties means that there is in reality additional consideration for the supply of the lease. This additional consideration could be non-monetary in form. This may be the case if, for example, the terms require the lessee to make an interest free loan, or possibly some other supply, to the lessor.

See also Tamburello Ltd at VIT64680.

Any questions about in-house leasing should be addressed to the Motor Trade VAT Unit of Expertise.

Please note that in-house leasing by a VAT Group is not relevant to the question of input tax relief (see VIT52100).