Updated on May 7, 2022
In Only Fools and Horses, Del Boy was a staunch supporter of the “no income tax, no VAT” policy.
Our goal in writing this essay is not to endorse Del Boy’s methods or to advocate that you pay with a briefcase full of used five-dollar bills, but rather to demonstrate how you can stay within HMRC’s guidelines while still avoiding VAT on a commercial vehicle acquisition.
VAT on a van for business
As a business owner, you should know that you may have to pay an additional 20% on top of the advertised price for a new or used van. A seller, if they are also a VAT-registered firm, must charge and remit this 20% VAT to HMRC.
If you’re buying from a dealership, you’ll be in this position, but if you’re buying from another type of business or a private individual, things could be different. A VAT-registered firm must also charge VAT to you. That’s not likely to be the case if you’re selling a van from a private seller.
When determining the entire cost of a new van, you should start with a VAT of 20%. To avoid the additional cost of VAT, there are a few options. You can either forego paying it at the time of purchase or claim it back after the fact.
Your business must be VAT-registered in order to claim any owed VAT refunds. Non-VAT registered businesses cannot claim their expenses, and the car must only be used for commercial purposes. The HM Revenue and Customs (HMRC) provides information on how to claim VAT on motor vehicles and commercial vehicles.
Buy a van from a non-registered seller
VAT cannot be charged on the sale price if the company or individual selling the van is not VAT registered. It would be illegal to charge. So it’s important to ask if a seller is VAT-registered when you first meet them.
Check to see if they’re VAT-registered by asking for an invoice. You can claim any applicable VAT back if you mention their registration number in your invoice.
Pay VAT on part of the purchase price
The VAT margin program is used by some VAT-registered businesses. In other words, they will only have to pay VAT on the difference between the price they paid for the vehicle and the price they are selling it for.
You will only be charged and pay HMRC 20% VAT on the difference of £1,500 if a dealer purchases a vehicle for £9,000, then sells it for £10,500. The difference between the £300 VAT bill and the £2,100 VAT bill on a ticket cost of £10,500 is significant.
However, under the VAT margin plan, the dealer must not present you with a VAT invoice, and you cannot attempt to reclaim the VAT from the vendor. A later example will show that in some cases this may not be a real benefit.
Buy a van through a limited company
Buying a new or used vehicle through a VAT-registered company is tax-deductible. If the vehicle is not categorised as a van, it cannot be used. Even if you used your estate car to make business deliveries, it wouldn’t be considered a van. Additionally, the car can only be used for official business. Tax and National Insurance charges will be levied on any use for private purposes.
A VAT-registered seller will bill you for VAT and you can reclaim the VAT you paid. Writing off the entire cost of the vehicle will also help you save money on your corporation tax bill.
Non-registered sellers aren’t eligible for VAT refunds, although they are eligible for corporation tax deductions.
Do a deal on price
As we pointed out in the section titled “Pay VAT on part of the purchase price,” purchasing under the VAT margin scheme may not always be advantageous. However, as this example indicates, both parties can benefit from negotiating a different price with the seller. Make sure you have a calculator on hand if you decide to go this route.
For £16,000, the dealer is offering a van. Because they paid $13,000 for the item, their profit margin was $3,000. You’ll have to pay VAT of £600, which you can’t get back under the VAT margin plan.
Additionally, the dealer has pay HMRC the VAT collected of £600 and that essentially lowers their profit by £2,400. To both of your benefit, however, you can ask your dealer to sell it to you outside of the VAT margin arrangement.
You’ll be on the hook for £18,840 if the selling price lowers to £15,700, which includes VAT on the selling price.
You’ll be able to get a refund for the VAT you paid, up to a total savings of £3140.
The dealer, on the other hand, stands to gain £15,700 after paying VAT to HMRC. After paying £600 to HMRC, they would have only been able to keep £15,400 under the VAT margin plan.
Support from Accounts and Legal
Here’s a quick rundown on how to avoid paying VAT on a van purchase. You may rely on our team of tax accountants to assist you understand the financial ramifications of purchasing a van for your business or verifying that you are adhering to VAT regulations.
On 0207 043 4000 or [email protected], we can answer your questions. A quick online accounting quote can also be obtained here.