3 mins | June 9, 2022

A guide to VAT in the automotive sector

The automotive sector raises an astonishing number of unique VAT challenges. That should be no surprise. The automotive value chain is extensive, complex and specialised. On the positive side, the automotive industries often present excellent...

A guide to VAT in the automotive sector

The automotive sector raises an astonishing number of unique VAT challenges. That should be no surprise. The automotive value chain is extensive, complex and specialised. On the positive side, the automotive industries often present excellent opportunities to optimise VAT automotive compliance and significantly save on the cost of doing business.

Background

Producing a motor vehicle involves an array of components, produced by specialised machinery. Often, the components are manufactured in different countries. Finally, the assembled vehicle is shipped to markets around the globe. At each point, VAT automotive compliance needs to be met. At the same time, opportunities to recover VAT should not be overlooked.  

On the other side of the equation, automotive consumers also face potentially complex VAT questions. To illustrate, showrooms selling vehicles to private customers will charge VAT at the specified rate. However, businesses purchasing vehicles for business purposes can often recover the VAT.

Multinational manufacturing: a supply chain fraught with VAT losses

In a globalised economy, many manufacturers find they can achieve efficiencies by producing components in different countries. The process can be especially efficient within a common economic area, such as the EU, where import VAT is not an issue.

However, in such cases, manufacturers will still likely need to register for VAT in each country in which they have operations. In addition, import VAT may still apply to materials and components imported from outside of the single market. For example, a VAT reclaim opportunity exists within imports that are done via DDP shipments. We will explain this in more detail further on.  

Managing multiple registrations, according to different regulations and filing procedures, is administratively demanding. Businesses can simplify the process by engaging with a centralised VAT solution that provides a single point of contact for global compliance.

Tooling VAT

Tooling VAT on specialised machinery used in automotive manufacturing is often very significant. In fact, the automotive industry is one of the sectors that incurs the most tooling VAT. A common example of a tooling VAT expense is injection moulds.

VAT on tooling is recoverable in many cases. However, the process is often complex and highly detailed. In order to maximise recovery and ensure full compliance, businesses should consult a team of tooling VAT experts for advice and assistance.

Optimising import VAT

There are many instances in which automotive companies incur import VAT. During the course of the manufacturing process, DDP shipped materials may be subject to VAT. And, of course, finished vehicles are shipped globally, creating VAT registration obligations. 

There are a number of advanced ways to manage import VAT, such as by taking advantage of deferments, or by reclaiming the VAT post shipment va the 13th directive. As such, an automotive business can greatly benefit from an experienced VAT partner with specialised skills and compliance technology.

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Claiming back VAT on cars

Shifting our focus to end-users, there are a number of ways to optimise VAT on automotive expenses. 

Car rental

If you rent a car for business purposes, you can generally reclaim some or all of the VAT, depending on variables such as the duration the vehicle is rented for. For VAT reclaim purposes, it’s important to get clarity on the precise regulations in each jurisdiction, especially if you operate in multiple countries. 

Vehicle purchases

If a new car is purchased for uses such as taxis and driving schools and instructions, you can recover the VAT as long as the vehicle is primarily used for business use and purposes.

You can also generally recover VAT on a motor vehicle purchased for a business. In such cases, specific conditions need to be met. Specifically, the vehicle can only be used for business purposes and is not available for private use (including an employee’s private use).

VAT on repairs

VAT on vehicle repairs is also reclaimable by businesses in the appropriate circumstances. However, the requirements are fairly narrow. For example, if you are a VAT-registered sole proprietor, you cannot reclaim the VAT on your vehicle. 

Are electric vehicles subject to VAT?

Some countries use VAT policies to incentivise electric vehicle purchases. In such cases, electric vehicles are zero-rated or subject to a lower VAT rate.

In Rwanda, for instance, electric cars and electric car parts are exempt from VAT and import duty. However, not all countries offer VAT discounts for electric vehicles. For example, in the UK, electric vehicles are subject to the same VAT rate as other vehicles.

Note also that these rules are subject to change. For example, Norway recently moved to replace its VAT exemption on electric vehicles with an alternative incentive scheme.

VAT on used cars

How do the VAT rate and tax differ on a used vehicle compared to a new vehicle? If you buy a used vehicle from a private individual, VAT does not apply. However, if you purchase a used vehicle from a dealership, the vehicle is generally subject to VAT.

Save money and ensure total VAT compliance

Whether you manufacture or sell motor vehicles, or if you simply purchase vehicles for business purposes, there are numerous opportunities for reclaiming VAT. 

That being said, it can be difficult to effectively identify all opportunities for VAT reclaim. When does the purchase of a vehicle classify as a business purchase?  Under what conditions are repairs and motor parts reclaimable? Which businesses are permitted to recover VAT on vehicle purchases?

As the world leader in VAT compliance and recovery, VAT IT will identify opportunities to reclaim VAT and provide the assistance and technology you need to maximise your VAT recovery and ensure you are 100% compliant, everywhere you do business. 

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