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HMRC internal manual

VAT Input Tax

Motoring expenses: damaged or stolen cars

All compensation payments received from insurers are outside the scope of VAT. They do not represent the consideration for any supply.

A car can be damaged whilst in transit to a dealer’s premises. When this happens carriers may only recover VAT paid on car repairs if the supply of repairs is to the carrier. If manufacturers or dealers arrange for the repair the VAT is their input tax even if the carrier is liable for the cost of the repair.

If an unused car is held on “sale or return” and is damaged beyond repair the dealer may adopt the car in order to sell it as a write-off. The VAT incurred on the supply of damaged cars to dealers is deductible by them. The dealer must account for output tax on the price at which the car is sold.

Any VAT incurred by dealers in carrying out repairs to cars, whether they are to be sold or used in their own business, is input tax. Cars stolen from carriers in transit are not supplied. Therefore, no output tax is due from the manufacturer, dealer or carrier.