Beta This part of GOV.UK is being rebuilt – find out what this means

HMRC internal manual

VAT Input Tax

From
HM Revenue & Customs
Updated
, see all updates

Motoring expenses: trade agreements with the Society of Motor Manufacturers and Traders

 

Double cab pick-ups

HMRC and the Society of Motor Manufacturers and Traders (SMMT) have agreed how the one tonne payload test will be applied in practice to double cab pick-ups.

Cars are treated quite differently for VAT purposes from commercial vehicles:

  • most ordinary business cars are subject to a block on input tax recovery which is a proxy for taxing the private use of the car;
  • the private use of commercial vehicles is taxed either by means of an input tax apportionment or a periodic output charge on actual private use;
  • a business that converts a commercial vehicle into a car becomes liable to an output tax charge on a “self-supply” of the vehicle to itself.

From 1 December 1999 vehicles are not treated as cars for VAT purposes if they have a payload of one tonne or more. Payload is the difference between a vehicle’s maximum gross weight and its kerbside weight. In practice the change mainly affects those vehicles generally described as double cab pick-ups.

Given the different treatment of cars and commercial vehicles it is important for manufacturers, distributors, dealers and business customers to know the payload of any double cab vehicle they sell or buy.

It is especially important to be aware that by adding accessories to the ex-works model they may, by lowering the payload of the vehicle, convert it into a car. This would make the vehicle liable to the self-supply charge. Such conversions are most likely to occur with double cabs that have an ex-works payload of 1000 to 1050 kg.

In order to provide simplicity and certainty, HMRC and the SMMT have agreed to simplify the treatment of these vehicles. Full details of the agreement can be found atNotice 700/57 Administrative agreements entered into with trade bodies.

Private use charge for company cars

HMRC and the Society of Motor Manufacturers and Traders (SMMT) have agreed a simplified method by which motor manufacturers, importers and wholesale distributors may calculate the VAT due on the private use of stock in trade cars provided free of charge to directors and employees.

From 1 December 1999 the stock in trade cars of motor manufacturers are not subject to the input tax block on cars. Provided a car continues to meet the definition of “stock in trade” private use of it will not cause the manufacturer to incur either an input tax block or a liability to declare output tax on a self-supply of the car.

Following that date manufacturers must account for output tax on any private use by directors and employees of a stock in trade car. Where the car is provided free of charge the normal VAT rules would require manufacturers to account for output tax in each tax period on the full cost of providing the car for private use. This would involve, in each tax period, reference to:

  • the depreciation of the capital cost of the car;
  • the value (excluding VAT) of repairs, maintenance and other running costs (excluding road fuel) on which VAT has been recovered; and
  • the actual proportion of business and private use.

Given that:

  • the valuation rules are complex and can lead to error, dispute or abuse;
  • strict application of the rules would be administratively burdensome; and
  • the pattern of depreciation and private use of stock in trade cars is similar across the industry

HMRC and the SMMT have agreed that manufacturers may choose to apply a simplified method of establishing the output tax due. Manufacturers who choose to use the simplified method must use it for all their stock in trade cars that are used privately by directors or employees.

Manufacturers may use the simplified method for cars within price band 6 but must use either the actual cost prices of the cars or average cost prices agreed with their local VAT office. In either event they remain within the simplified method. Manufacturers who choose not to adopt the simplified method must either apply the normal rules or apply to their local VAT office to use an individual simplified method.

Full details of the method can be found at Notice 700/57 Administrative agreements entered into with trade bodies.

Private use charge for dealer demonstrators

HMRC and the Retail Motor Industry Federation (RMI) have agreed a simplified method that can be used with effect from 1 December 1999. Under the method retail motor dealers may calculate the VAT due on the private use of demonstrator cars provided free of charge to directors and employees.

The stock in trade cars of motor dealers are not subject to the input tax block on cars. In practice, this change mainly affects the treatment 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 by directors and employees of a demonstrator on which they recovered input tax. Where the car is provided free of charge the normal VAT rules would require dealers to account for output tax in each tax period on the full cost of providing the car for private use. HMRC and the RMI have agreed that dealers can choose to apply a simplified method of establishing the output tax due.

The RMI have reviewed the agreement and concluded that an employee-based method would be preferable. This is especially so for those dealers whose demonstrators always outnumber the employees able to use them. Therefore a revised simplified method has been agreed.

The previous formal agreement containing the car-based simplified method was withdrawn with effect from 1 July 2000. However, any dealers that wished to carry on using that method were approved to do so by HMRC and were not required to notify their local VAT Office of their intention.

The method works by adopting five price bands and average prices within those bands to give five standard annual VAT values. It is these values that are the key to the simplification. Each VAT value represents the full annual cost of providing an employee with a demonstrator for private use.

Full details of:

  • the simplified method and
  • the revised simplified method

can be found at Notice 700/57 Administrative agreements entered into with trade bodies.

Dealers with non-standard tax periods should apply the appropriate proportion to the annual VAT due amount.

Private use charge for daily rental cars

HMRC and the British Vehicle Rental and Leasing Association (BVRLA) have agreed a simplified method which daily rental companies may use to calculate the VAT due on:

  • the incidental private use of their hire fleets that are taken home overnight; or
  • otherwise used privately;

if the use is:

  • free of charge; or
  • by directors or employees.

The arrangements do not apply to any ordinary company cars which are not part of the hire fleet. These cars are subject to the input tax block and no further tax on private use is due.

From 1 August 1992, daily rental companies have been entitled to deduct input VAT on the purchase of cars to be used “primarily for a relevant purpose“. The use of the word “primarily“, was to recognise that there may be a small element of private use by the daily rental company during the rental lifetime of the car. This is in contrast to cars purchased by leasing companies who can deduct the VAT on purchase (from 1 August 1995) provided the car is used “wholly for business purposes“.

The VAT legislation requires that where assets are used for private purposes a supply of services takes place. Where the services are provided for no consideration the value of those services is the cost to the employer of providing those services.

The calculation of this value would involve, in each tax period, reference to:

  • the depreciation of the capital cost of the car;
  • the value (excluding VAT) of repairs, maintenance and other running costs (excluding road fuel) on which VAT had been recovered; and
  • the actual proportion of business and private use.

Similar rules apply when services, for example the leasing of cars, are put to private use.

Given that:

  • the valuation rules are complex and can lead to error, dispute or abuse;
  • strict application of the rules would be administratively burdensome; and
  • the pattern of depreciation and private use of daily rental cars is similar across the industry

HMRC and the BVRLA have agreed that daily rental companies may choose to apply a simplified method of establishing the output tax due. Daily rental companies who choose to use the simplified method must do so for all their daily rental cars which are put to private use. Daily rental companies who choose not to adopt the simplified method must either apply the normal rules or apply to their local VAT office to use an individual simplified method.

Full details of how the method works can be found at Notice 700/57 Administrative agreements entered into with trade bodies.

Daily rental companies with non-standard tax periods should apply the appropriate proportion to the annual amount.

The simplified method could be used from 1 October 2000.