Some businesses find it beneficial to lease a motor vehicle for a specific period of time as opposed to acquiring the same vehicle outright. Commonly, vehicle leasing for a business is most applauded for its benefits which include, among others, lower monthly payments, no vehicle running costs and also the fact that a business will not be burdened by depreciation related costs as the car gets older.
However, in as much as such notions make business sense, it is also imperative that business operators understand that Value Added Tax (VAT) incurred on vehicle leasing/hire payments cannot be claimed for VAT purposes. The same VAT claim prohibition applies on the outright acquisition of passenger vehicles. We must make it clear that this only applies to passenger vehicles, including double cabs and doesn’t impact goods vehicles such as bakkies or lorries. In this article, words importing the masculine shall be deemed to include the feminine.
Enter input tax claim
A business operator making taxable supplies is generally entitled to claim a credit of VAT incurred on purchases i.e., input tax, if it possesses a valid tax invoice from the supplier. However, the VAT Act actually provides specific provisions that prohibits taxpayers from claiming an input tax on the purchase, lease, hire or importation of a passenger vehicle. Let us first have a closer look at what is regarded as a passenger vehicle and what actually warrants the exclusion to claim input tax.
The passenger vehicle
The VAT Act defines a passenger vehicle as ‘a vehicle designed or adapted for the transport of nine or fewer seated persons, including a double cab vehicle but does not include a safari vehicle.’ The Act further provides that input tax on the said vehicle can only be claimed by a person in the business of hiring, or leasing such vehicles. Consequently, a client of a leasing company or simply, a person not in the business of hiring vehicles cannot claim input tax unless the hired vehicle is a single cab, bakkie, bus etc.
It should be noted that the key determining fact expounded by the statutory definition is hinged on the mere factor of whether the vehicle is constructed or designed for transporting nine or less passengers. Accordingly, the definition excludes, bakkies, trucks or lorries from the ambit of passenger vehicles. Therefore, input VAT on such can be claimed whether they are acquired, leased, or hired. Put differently, the assessment of whether a vehicle is a passenger vehicle lies in the construction or adaption of the vehicle in the physical sense, not necessarily its specific use. A company which buys or leases double cabs which it uses for delivery of goods cannot claim the VAT on the acquisition or hire of such vehicles, despite the fact that they are used to advance its business.
The prohibited claim
Based on the above analogy it is apparent that the VAT Act solely permits a person in the business of ‘dealing in, or hiring of,’ passenger vehicles to claim input tax expenditure on either the outright purchase or hire of such passenger vehicles. The prohibition will also cascade to the car dealer if he also acquires or hires a passenger vehicle for his employees or management team. In this regard, the dividing line on this matter is clearly on the supply of the passenger motor vehicle itself that is not subject to input tax claim. However, operating costs of the vehicle itself such as repairs and maintenance may be claimed as input tax subject to obtaining a valid tax invoice from the supplier.
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