Are you planning to purchase a new vehicle for use in your business? If so, if you are registered with SARS as a VAT vendor, are you under the impression that you may claim a refund of the VAT charged to you by the seller of the vehicle?
BEWARE- there are only very limited circumstances, even when buying a business vehicle which will be used to generate the income in your business, that you are allowed to claim the VAT charged to you as a refund.
Claiming a VAT refund by mistake could be very costly, so it is important that you know exactly what the position is upfront. If you are not allowed to claim the VAT, it would likely mean that you are paying more than you might have been intending to pay for the vehicle (as the VAT is then part of the overall cost) and an error on your VAT return (overclaiming a VAT refund) to SARS could result in you having to pay penalties and interest.
So, when is it ok to claim a VAT refund for a new business vehicle?
The first and obvious occasion is if you operate a car dealership business – buying and selling cars as your business, or car rental business- essentially renting cars to the public. In both instances you will also charge VAT to your customers on selling or renting the vehicle.
Otherwise, subject to some limited exceptions, you may only claim the refund when the vehicle is NOT a “motor car”.
A “motor car” is clearly defined as including ‘a motor car, station wagon, minibus, double cab light delivery vehicle and any other motor vehicle of a kind normally used on public roads, which has three or more wheels and is constructed or converted wholly or mainly for the carriage of passengers’. I have emphasized the words that illustrate what it is that the tax lawmakers don’t want you to be able to claim the VAT refund on. It is thus, largely, clear that you can’t claim a VAT refund when you buy motor cars and minibuses, but you can when you buy lorries, two-wheel motorbikes and tractors.
This can nevertheless be confusing because when you look at the ‘the carriage of passengers’ requirement and you are deciding whether the VAT on the vehicle will qualify to be refunded, the question you need to ask yourself is not whether the vehicle is actually used for the purpose of the carriage of passengers, but whether that is what it is designed(constructed or converted) for.
So, for example, if you buy a Toyota Corolla and use it only to transport your trading stock to your customers you still won’t be able to claim a refund of the input tax because, even though you only use it to carry goods and not people, the car was constructed for the purpose of carrying people.
To demonstrate the constructed purpose more clearly- if, on the other hand, you buy a single cab bakkie (designed to carry goods, not passengers), but use it only for carrying people, you will still be able to claim the input VAT. On this front, however, a double cab bakkie (which has two rows of seats for carrying people) does not qualify for a VAT refund, despite all the space in the back which can be used for carrying goods.
Like most tax rules, however, there are a number of exceptions and clarifications. So, if you are buying any of the following vehicles you will be able to claim a refund of the VAT charged, notwithstanding that the vehicles may be designed specifically to carry passengers:
- Vehicles capable of accommodating only one person or suitable for carrying more than 16 persons – thus the VAT on a large bus may be claimed, but it is clear that this does not open the door for a VAT refund on purchase of a minibus which is designed to carry 16 people or less;
- Vehicles of an unladen mass of 3 500 kilograms or more- thus large vehicles;
- Caravans and ambulances;
- Vehicles constructed for a special purpose other than the carriage of persons and having no accommodation for carrying persons other than such as is incidental to that purpose- an example might be a tractor or road construction vehicles eg earthmoving equipment;
- game viewing vehicles constructed or permanently converted for the carriage of seven or more passengers for game viewing in national parks, game reserves, sanctuaries or safari areas and used exclusively for that purpose, other than use which is merely incidental and subordinate to that use, but not if they are sedans, station wagons, minibuses or double cab light delivery vehicles; or
- vehicles, constructed as or permanently converted into hearses and used exclusively for that purpose;
- there is also a specific provision relating to people who provide cars as prizes for betting transactions, for example, in a casino.
But, can you claim a refund of the VAT charged to you when you buy, for example, a car or minibus to be used as a taxi or to be used to transport hotel guests and their luggage to and from the local airport, or to take people on tour of the local city or the area. The confusion on this point arises because the passengers are charged a fee for the transport service. You would then, however, be viewed as conducting a transport service business which is “exempt” for VAT purposes. This would mean that you may not charge VAT to your passengers and, equally so, may not claim a refund of the VAT when you buy the vehicle. (Special rules however apply if you are transporting the people across the South African border to other countries).
So now you know the position if you buy a “motor car”, but what about when you or your employees have to go to another city or town for business purposes and you hire a car for them to use? Again, if it is a “motor car”, you are not entitled to claim the VAT charged by the car rental company as a refund.
It’s not all bad news though-
Remember that the VAT you have not been refunded will still be a cost in your business and will, thus, be deductible for income tax purposes through the depreciation (wear and tear) deduction or as a deductible rental expense.
In addition, notwithstanding that you can’t claim a VAT refund if you are supplied with a motor car or the use of a motor car it is important to ensure that you claim a refund of VAT charged to you on any repairs or maintenance of the car, and on the insurance of the car.