Motoring advice: VAT rules for company cars

Many businesses use company cars to entice new employees or retain existing staff. They can be an attractive perk of the job. However, businesses need to be aware of HMRC regulations of both company car and pool car schemes.

By Andrew Stephenson, senior VAT and investigations manager, Pierce.

The purpose of the car has an impact on VAT recovery. Is it strictly just for business use in the form of a pool car, or is it a company car which can be used for work and personal travel? This detail should be clearly stated in the employee’s contract.

Private use of a car includes travelling between home and work, unless it is a temporary place of work. If not intended for personal use, measures should be enforced to prevent it using either a physical or contractual restraint.

Physical constraints can include ensuring that keys are locked away and a log book or diary is maintained showing who booked the car out and when, as well as details of the journey and mileage. Best practice would also include having clear rules in place stating the circumstances in which a car can be booked out.

In addition to terms and conditions of employment prohibiting private use, there should be some form of censure available to bring against an officer or employee who is found to be using the car for a private journey, typically, in the form of disciplinary proceedings.

Companies should develop an employee guide on company car use and require employees to sign the document to demonstrate that they have understood the terms. As a general rule, under Article 7 of the VAT Input Tax order, if correct procedures are in place, then a company can reclaim VAT on the purchase of a pool car if it is strictly for business use only.

pierce.co.uk