VAT on commercial vehicles: how it works

Most businesses understand VAT on commercial vehicles can be reclaimed as input tax on their VAT return,  unlike cars. But what is classed as a commercial vehicle?

You would assume it would be easy to identify a commercial vehicle, such as an HGV or a transit van and in most cases it is. However, vehicle companies manufacture many vehicles that have a dual purpose.

What are dual purpose vehicles?

These vehicles are usually car-derived vans sold as lifestyle vehicles that can be used for both business and private use. They may look similar to cars, but the manufacturer will have made alterations to make them suitable for use as a commercial vehicle. For example, the vehicle may have no rear window or rear seats.

Schedule 6 of the Road Traffic Regulation Act 1984 describes a car-derived van as:
‘a goods vehicle which is constructed or adapted as a derivative of a passenger vehicle and which has a maximum laden weight not exceeding 2 tonnes.’

In 2015, HMRC produced a list of dual-purpose vehicles such as combi vans. This list provides information on which vehicles HMRC classifies as commercial and which are not. The list can be found at HM Revenue and Customs: car-derived vans and combi vans.

Despite being many years old, this list has not been updated.

How to claim back VAT on commercial vehicles

If you are claiming back the VAT on a commercial vehicle, it is important to identify when it is being used for private use, as HMRC will expect you to be able to demonstrate the level of non-business use.

If the vehicle is put to private use, you may be required to adjust the VAT claimed. HMRC will allow individuals to claim all the VAT if private use is minimal, but you must demonstrate this.

In practice, if you buy a commercial vehicle for your business, you can often reclaim the VAT in full. However, if it has a dual purpose and is used significantly for private use, there will be a restriction on the VAT you can reclaim. 

Please note that if you cannot reclaim all the VAT when you purchased the vehicle, you must charge VAT when you sell it.

There are further VAT implications for repairs, fuel and other motoring expenses you should be aware of. Leased vehicles also have their own VAT requirements that individuals should be aware of, as do electric vehicles.

VAT remains one of the least understood of all taxes, which is why we set up a specialist VAT advisory department, to help guide businesses through the complex maze of VAT legislation.  

Our team help with all areas of VAT from relatively basic issues such as initial registration, the completion and submission of VAT returns and advice on how to correct errors and mistakes, through to more complex issues such as assessments, control visits, cross border transactions and DIY house builds.