Motor Cars and VAT - A Practical Guide for Business
When it comes to buying vehicles for business use in South Africa, understanding VAT rules is crucial, especially for vehicles that fall under the category of "motor cars." The VAT Act, 89 of 1991 together with the SARS Interpretation Note 82 (IN 82) and the VAT Guide for Vendors, provides detailed guidance on when VAT can and cannot be claimed on motor vehicles. In this article we look at the essential VAT treatment for motor cars, with references to the SARS documents to help you apply the correct tax treatment.
What is a 'Motor Car' and Why It Matters
According to Section 1(1) of the VAT Act, the term “motor car” includes most passenger vehicles, such as standard cars, SUVs, station wagons, and double-cab bakkies. The definition specifies that any vehicle designed mainly for carrying passengers on public roads is considered a motor car, with some exceptions, like single-cab bakkies and trucks, which are designed for goods transport.
The distinction is crucial because Section 17(2)(c) of the VAT Act generally prohibits input VAT claims on vehicles categorised as motor cars, except when specific conditions are met.
When Input VAT Can Be Claimed
Although input VAT is usually denied for motor cars, certain situations allow businesses to claim VAT. These scenarios as explained in detail in par 8.2 of IN 82 include:
Motor Dealers: Dealers can claim input VAT on vehicles bought for resale.
Demonstration Vehicles: Vehicles used exclusively for demonstration purposes are eligible for input VAT.
Prizes and Promotions: Vehicles awarded as prizes in promotions may allow for VAT claims.
Is it a Motor Car? Applying the Objective Test
To determine whether a vehicle falls under the motor car definition, IN 82 provides an objective test. This test requires measuring the space of the passenger area relative to the cargo area (excluding the engine). If the passenger space occupies more than 50% of the interior length, the vehicle is considered a motor car, regardless of its intended use. This test helps ensure that vehicles primarily designed for passenger transport do not qualify for VAT deductions. For further guidance, see IN 82, Section 3.2.3.
For example, consider a business that needs an armoured double cab bakkie to transport high-value goods. If the vehicle's passenger area (front and rear seats) exceeds 50% of the total interior length, it would still be classified as a motor car according to the objective test, even though it serves a unique business purpose. Tax Case 1345 highlighted this principle, where the court found that a vehicle’s construction for passenger use prevails over its actual use. Even though the vehicle’s design is for transporting goods, the objective test showed that the vehicle was mainly for passengers, which made it a motor car for VAT purposes.
Output VAT When Selling Motor Cars
If input VAT was initially denied (for example, in cases of company cars for passenger transport), output VAT does not need to be charged when selling the vehicle. However, if input VAT was claimed (such as for vehicles in stock by dealers), output VAT must be declared upon sale.
VAT on Vehicle Modifications
VAT on separate costs for modifications, such as adding cargo racks or armouring for security, can often be claimed if these expenses are directly related to business needs. However, this only applies if the costs are distinct from the initial vehicle purchase and are solely for business purposes.
VAT Treatment When a Vehicle's Purpose Changes
Sometimes, a business may change the use of a vehicle from passenger transport to a delivery vehicle (or vice versa). How would this influence the treatment of VAT?
When a vehicle initially purchased qualifies as a ‘motor car’ but later converted into a delivery vehicle, VAT on the original purchase remains non-deductible. The initial purpose and classification at the time of purchase will determine the VAT treatment, so if input VAT was not claimable at that time (as with a typical motor car), this status does not change retroactively.
Consider the following example:
A business buys an SUV (classified as a motor car) primarily for transporting employees. Since it's categorised as a motor car, input VAT cannot be claimed. Later, the business decides to convert this SUV into a delivery vehicle, removing the rear seats and installing cargo racks. Despite the conversion, the original purchase VAT remains non-claimable because it was acquired for passenger use.
Converting a Motor Car into a Delivery Vehicle
When converting the vehicle to a delivery function, VAT on the costs of modifications—like removing seats and adding racks—can be claimed if they are directly related to the vehicle’s new business purpose. This VAT claim is only possible if:
The modifications are essential for the vehicle to function as a delivery vehicle, and
They occur after the initial purchase, and
The vehicle is now used exclusively for taxable supplies (i.e., for business purposes, not private or exempt use).
For example, a business spends R20,000 to convert an SUV into a delivery vehicle. This cost includes R3,000 VAT, which can be claimed as input VAT if the modifications are necessary for business use.
Converting Vehicle into a Non-Taxable Purpose
Input VAT on expenses relating to repair, maintenance and insurance incurred due to acquiring a motor car may be deducted as input tax to the extent that the motor car is used, consumed or supplied when making taxable supplies.
Remember that if the vehicle is used only partially for taxable supplies, these expenses should also be apportioned (refer to par 3.7 of IN 38).
When a business initially purchases a motor car for a taxable purpose (such as to generate revenue from commercial activities) and then later uses it for a non-taxable or private purpose, it must adjust for VAT on certain running expenses, such as repairs, maintenance, and insurance. This means that VAT previously claimed on these expenses must now be partially repaid to SARS when the vehicle is used for non-taxable activities.
Consider the following example:
ABC Property Rental Company bought a motor car on 1 February 2014 to transport clients to view commercial properties, which is a taxable activity. ABC claimed input VAT on its annual insurance premium of R11,500. However, on 1 August 2014, ABC started using the car exclusively to transport clients for residential property viewings, a VAT-exempt activity.
For the six months it used the car for commercial purposes, ABC could claim R1,500 as input VAT on the insurance premium. Once the car’s use switches to residential viewings, ABC must account for output VAT on the remaining insurance cost that now supports an exempt activity. ABC should declare an output VAT of R750 (reflecting six months of the R11,500 annual premium) in its August VAT return. This adjustment ensures that VAT benefits only apply while the vehicle supports taxable activities.
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