V3.443 Motor cars
The UK exclusion from credit for input tax incurred on the supply, acquisition or importation of motor cars is derived from Directive 2006/112/EC art 1761. The validity of this exclusion was challenged in three linked cases2 brought in relation to the pre-1 August 1995 legislation involving input tax incurred on the purchase of motor cars used for a car leasing business, the purchase of cars for the use of employees (including private use), and the purchase of cars by a motor dealer for leasing and use as demonstrators respectively. In all three cases, the European Court of Justice upheld the validity of the exclusion. The ECJ, in an unconnected case, had earlier ruled that member states were entitled to retain national rules which permit them to deny input tax recovery on new means of transport3.
Significant changes were made, with effect from 1 August 1995, to the treatment of any input tax credit on supplies of motor cars. The commentary below reflects the legislation applying from that date.
The amendments to the pre-1 August 1995 rules were introduced following the derogation granted to the UK4 to “restrict to 50 per cent the right of the hirer or the lessee to deduct input tax on charges for the hire or lease of a passenger car where the car is used for private purposes”. Subject to the exceptions set out below, tax charged on the supply to, or acquisition or importation by, a taxable person of a motor car is excluded