OUTPUT TAX - CARS - 30.08.2016

Selling a business-owned car

Buying a car in the business

When you come to sell a car that’s been used in the business the VAT liability is determined by the circumstances of its purchase. There are three basic scenarios when purchasing a car:

1. The car is used for 100% business purposes such as a pool car, hire car, taxi, etc. The VAT on the purchase is fully recoverable. This is known as a qualifying car.
2. The car has some business use and the VAT on the purchase is blocked so that no VAT can be reclaimed.
3. The business buys a second-hand car through the margin scheme, in which case the VAT is not recoverable.

The different circumstances of the purchase will impact on whether, and how much, output tax has to be accounted for on the sale.

No private use

When a business has no private use of a car that it owns and it has been able to recover the VAT on the purchase, VAT is due on the full selling price.

Example. A company buys a car for £20,000 plus £4,000 VAT and uses it as a pool car. As there is no private use it is classified as a qualifying car so it can recover the full £4,000 VAT charged on the purchase. Three years later the company sells the car for £10,000 but has to charge VAT of £2,000.

Some private use

Where there is some private use of the car, input tax recovery is blocked (VAT (Input Tax) Order 1992 (Statutory Instrument 1992/3222)) and the business has no VAT recovery on its purchase. Following the decision in EC Comm v Italian Republic Case C-45/95 the sale of a car where the input tax has been blocked is treated as an exempt supply. This means that no VAT is due on the sale but as it is an exempt supply input tax cannot be recovered on associated costs such as auctioneer’s fees.

Tip. Because the sale of a car is treated as the sale of a capital asset it is disregarded for the purposes of the partial exemption calculation and will not restrict the input tax recovery on its general overheads.

Second-hand margin scheme

If you buy a car through the second-hand margin scheme the seller only accounts for VAT on the profit margin and does not issue a tax invoice. As such you cannot recover any VAT on the purchase as there is no tax invoice.

When you come to sell the car you only have to account for VAT on any profit made. In most cases the sale price will be lower than the purchase price so no VAT will be due on the sale but any related input tax on auctioneer’s fees would be recoverable. If the car is sold at a profit then VAT is due on the profit element only.

Example. A second-hand car is bought for use in the business for £15,000. A year later it’s sold for £16,000. This gives a profit of £1,000 with VAT due of £166.66 (£1,000/6) even though no VAT was claimed on the purchase.