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HMRC internal manual

VAT Input Tax

Motoring expenses: taxing the private use of cars

Effect of the input tax block
Provision of leased cars by health authorities to their employees
Private use of input tax relieved cars
Private use of demonstrator cars
Private use of stock in trade cars
Private use of pool cars
Private use of vehicles other than cars
Accounting for output tax on the private use of a vehicle provided free of charge

{#IDAYI5NC}Effect of the input tax block


  • the input tax on a car is blocked in full on its purchase; or
  • the car is leased and 50% of the input tax is restricted

the block on input tax recovery provides the proxy for the taxation of private use of motor cars. Since 1 August 1995 any charge made to employees for the use of a motor car has been de-supplied for VAT purposes providing the car had been subject to a block. So in most cases output tax need not be charged on the sums paid by employees.

{#IDAPJ5NC}Provision of leased cars by health authorities to their employees

An exception is the provision of cars by health authorities that lease cars and then provide them to employees. Health authorities are not subject to a 50% block on the tax incurred on leasing. This is the result of a Treasury direction made under section 41 of the VAT Act 1994. Therefore, cars leased by Health Authorities after 1 August 1995 will not have been subject to any block.

This means that any charges made to employees will remain taxable. However, when the health authorities provide cars on the basis of salary sacrifice the rules contained in the VAT (Treatment of Transactions) Order 1992 still apply. When this happens, the salary sacrifice element of any charge will remain de-supplied.

{#IDA1J5NC}Private use of input tax relieved cars

Some cars may have qualified for input tax relief despite them being used for private purposes by employees. These are cars which are either:

  • the stock in trade of motor manufacturers or dealers (see VIT52400); or
  • cars that are used primarily for taxi hire, self drive hire or driving tuition (see VIT52400);

The business can claim full input tax recovery on such cars, but must account for output tax on actual private use (see VIT55400).

{#IDAEL5NC}Private use of demonstrator cars

Provided a demonstrator meets the definition of “stock in trade” private use of it will not cause the dealer to incur either:

  • an input tax block; or
  • a liability to declare output tax on a self-supply of the car

Dealers must account for output tax on any private use. HMRC and the Retail Motor Industry Federation have agreed a simplified method by which the motor dealers may calculate the VAT due on the private use of demonstrator cars provided to directors and employees free of charge. Further details are at VIT56600.

See also Caledonia Motor Group Ltd at VIT64690.

{#IDALM5NC}Private use of stock in trade cars

Motor manufacturers and dealers can claim full input tax recovery on stock in trade cars (see VIT52400). However, they must account for VAT on the private use of these cars by employees or similar people.

They are not obliged to account for VAT on the private use of cars which they have loaned to third parties for business purposes. Examples would include when a manufacturer loans a car to a dealer, a potential customer or the press.

The normal rules for taxing the private use of cars provided free of charge to employees are complex. Therefore, HMRC policy is to allow manufacturers and dealers maximum flexibility within the law to achieve a fair and reasonable result. They have three choices - see VIT56600.

  • normal rules; or
  • individual simplified method; or
  • standard simplified method.

{#IDAXN5NC}Private use of pool cars

Pool cars are cars that are:

  • not allocated to an individual;
  • not used for private motoring; and
  • not kept overnight near an employee’s home.

Incidental private use of a pool car that may occur on business journeys, for example lunch stops, can be ignored.

Home to office journeys are always considered to be private journeys. As a result cars that are taken home by employees will cease to qualify to be treated as pool cars. Some business have a policy that allows employees to take pool cars home en route to a business appointment the next day. If this is the case HMRC staff should seek further clarification from the Motor Trade VAT Unit of Expertise on whether the input tax should be blocked.

If a pool car that qualified for full input tax recovery when it was bought stops being used exclusively for a qualifying purpose, for example if it is allocated to a specific employee, it no longer qualifies as a pool car. A self supply charge will be triggered (see VIT56000).

Please refer to Masterguard Security Services Ltd and Peter Jackson (Jewellers) Ltd at VIT64690.

{#IDALP5NC}Private use of vehicles other than cars

VAT on the purchase of any road vehicle other than a car is subject to the normal rules. VAT on lorries, vans, and all other vehicles which are not cars can be recovered if they are:

  • supplied to a registered person; and
  • used for the purpose of the business.

HMRC regards any use of a commercial vehicle which is incidental to the business use as de minimis. An example would be where a business owns a car and a van, and the van has to be taken to a private residence overnight for security of the vehicle and its contents.

However, HMRC staff will look more closely at those types of commercial vehicle that are suitable for private use. Especially we will look closely at vehicles like motor caravans, motorcycles and double cabs which, although not cars for VAT purposes, are often marketed as dual purpose commercial/lifestyle vehicles.

For commercial vehicles or double cab pick ups HMRC usually sees incidental use as infrequent use of the vehicle for private purposes no more than three or four times a year. This would normally represent no more than about 5% private use in any twelve month period.

A business might own a commercial vehicle which is the only vehicle available to be used by the sole proprietor, a partner or a particular employee. When this happens it is likely that it will also be used for that person’s private motoring. In these circumstances HMRC would not accept that the private use is de minimis.

In cases where the private use is more than de minimis the trader should either:

  • apportion the tax on purchase; or
  • recover the input tax in full and account for output tax each period under the Lennartz principle.

{#IDAAR5NC}Accounting for output tax on the private use of a vehicle provided free of charge

Where a business:

  • adopts the Lennartz approach to accounting for VAT on the private use of an input tax relieved vehicle; and
  • there is no charge made for that use

the value of the supply is the full cost to the business of providing the car. This will usually include depreciation, repairs and other running costs. But it will not include any VAT that has been recovered as input tax.

In determining the cost of the private use any period when the vehicle is unused should be ignored. See Enkler at VIT64690.