In most circumstances, VAT cannot be reclaimed on the purchase of a car (commercial vehicles are different).
There are a few exceptions to the block, for example special purpose cars such as purpose-built taxis and driving school vehicles. This won’t apply to most businesses but there is another exception which might.
VAT can be reclaimed if the car meets two conditions:
1. It must be used exclusively for business purposes
2. It must not be available for private use
In practice it is difficult to convince HMRC that these conditions are being met so expect an argument if you try to reclaim VAT on a car.
The first point to make is that the car must be normally kept at business premises outside working hours. Keeping it at home will almost certainly result in the VAT reclaim being rejected. So, if you work from home, you are unlikely to succeed.
HMRC have contested VAT refund claims on the grounds that the employee driving the vehicle occasionally took detours, for example to go to a shop or buy lunch, and, therefore the vehicle was not used exclusively for business purposes.
Fortunately, there has been a tribunal case where the judge took the view that minimal incidental journeys were inevitable and, effectively, said that, provided such digressions were small, the requirement that it must be used exclusively for business purposes was satisfied.
HMRC then argued that the vehicle insurance included SD&P (Social, Domestic & Pleasure) use. Since this is pretty standard wording on an insurance policy and it would be difficult to get an insurance company to word the insurance certificate in any other way, the tribunal found against HMRC.
If you are thinking about buying a car and reclaiming VAT, you should take a few precautions, just in case:
1. Do not let anyone, including you, take the car home unless you can prove they had an early start away from the workplace the following day and it would be easier for them to go from home
2. Keep a log of all business journeys, which should match back to the mileage recorded on the odometer and MOT certificates
3. Ensure that each employee signs an agreement including a clause stipulating that no private use is allowed. This could be part of an employment contract
Please remember and keep in mind, that if HMRC can demonstrate that you permitted the car to be used for any non-business purpose, whether explicitly or tacitly, you could be required to repay all of the VAT you claimed on the car.