Input VAT and motor cars

A vendor is generally not entitled to deduct input tax on the acquisition of a motor car, irrespective of whether it is applied for taxable purposes or not. The input tax is denied even if the vendor paid Value-Added Tax (‘VAT’) when the goods or services were acquired and is going to use the goods or services for the making of taxable supplies (section 17(2) of the VAT Act). To determine whether input tax can be claimed, a vendor must first establish whether the vehicle is a ‘motor car’, as defined in section  1 of the VAT Act.

The definition of ‘motor car’

The definition of ‘motor car’ contains five categories, namely motor car, station wagon, minibus, double cab light delivery vehicle and any other motor vehicle that is typically used on public roads, has three or more wheels and is constructed or converted wholly or mainly for the carriage of passengers. Once it is established that a vehicle does not fall within one of the first four categories, a determination must be made to confirm whether it falls within the fifth category. The outcome of the test is a question of fact, and where uncertainty exists, an objective test must be applied. (That is, to determine whether the vehicle is intended mainly (more than 50%) for the carriage of passengers.)

If the vehicle concerned qualifies as a ‘motor car’ as defined, the input tax will be denied unless the vendor is a motor car dealer or car rental enterprise, as provided in the exceptions in section 17(2)(c).

A ‘motor car’ expressly excludes the following:

• Vehicles capable of transporting only one person or suitable for carrying more than sixteen persons,
• Vehicles with an unladen mass of 3 500 kg or more,
• Caravans,
• Ambulances,
• Vehicles constructed for a purpose other than the transport of persons that cannot transport passengers other than such as is incidental to that purpose,
• Game viewing vehicles constructed or permanently converted for the carriage of seven or more passengers for game viewing. The game viewing vehicle should be used in national parks, game reserves, sanctuaries or safari areas and exclusively for the purpose of game viewing, other than use that is merely incidental and subordinate to that use, and
• Vehicles constructed as or permanently converted into hearses for transporting deceased persons and used exclusively for that purpose.

Club cabs and extended cabs

Motor vehicle manufacturers use various terms to describe a pick-up truck, which in South Africa is commonly called a ‘bakkie’. A ‘club cab’ is one of several terms used to describe a bakkie with rear seats. Interpretation Note 82 considers that a club cab has two traditional full-sized doors and extra space behind the driver’s seat that houses two ‘jump seats’, a full bench or fold-up seats (rear seats). Alternatively, the club cab may have a toolbox or storage compartment fitted behind the driver’s seat. The seating or storage area is accessed by tilting the front seat forward. Whereas an extended cab is a club cab, as described above, with two traditional full-sized doors and two smaller-sized rear doors (suicide doors) on one or both sides of the vehicle. Club cabs and extended cabs are generally used on public roads, have three or more wheels and are designed for carrying both passengers and goods.

The objective test must, therefore, be applied to determine whether these vehicles are, in fact, constructed or converted wholly or mainly for the carriage of passengers. To apply the objective test, the entire passenger cabin (enclosed passenger seating area excluding the engine) is regarded as the area available to passengers irrespective of whether or not there are fold-up seats. In the case where there is a toolbox or storage compartment fitted behind the driver’s seat incapable of accommodating passengers, such area will be regarded as the dedicated loading space within the passenger cabin. It follows that if the length of the passenger cabin or the area available to passengers within the passenger cabin measures more than the dedicated load area, the vehicle is designed mainly for the carriage of passengers and falls within the ambit of the definition of ‘motor car’. Alternatively, if the dedicated load area of the club or extended cab is larger than the passenger cabin, the vehicle is constructed or converted mainly for carrying goods rather than passengers (that is, it is not a ‘motor car’ as defined).

Notably, the input VAT incurred on renting a ‘motor car’ as defined will also be denied.

Panel vans

A panel van is a small enclosed delivery vehicle that generally consists of a single row of seats, two front doors, a rear door or two, no rear side windows and may contain rear or fold-up seats.

In applying the objective test, if the dedicated load area exceeds the area available to passengers, a panel van would not be constructed or converted mainly for the carriage of passengers and, therefore, would not fall within the fifth category. As a result, such a panel van is not a ‘motor car’ as defined.

Certain panel vans have a partition or gate behind the last row of seats, thereby separating the passenger area from the dedicated loading area. For purposes of applying the objective test, the area in front of the screen (housing the driver and passenger seats but excluding the engine) is regarded as the area constructed exclusively for passengers. It must be measured in relation to the dedicated loading space.

Accessories

An input tax deduction is denied to the extent that accessories form part of the standard structure of a motor car (accessories fitted to the motor car as it comes off the manufacturer’s production line) regardless of whether they are separately specified on the tax invoice or not. Accessories that may be regarded as forming part of the standard structure of a motor car include, amongst others, the alarm, spare wheel, bull bar, gear lock, tow bar, tinted windows, air conditioner, rubberising and spotlights. In these instances, the accessories are regarded as part of the motor car supply, and the input tax is denied.

The provisions of section 17(2)(c) prohibiting the deduction of input tax on a motor car are not applicable if accessories are purchased and invoiced separately from the acquisition of the motor car and do not form part of the standard structure of the motor car when it is supplied. The accessories are regarded as not forming part of the vehicle structure if the accessories are removable and do not form part of the initial standard structure of the vehicle. Examples of such accessories are a fire extinguisher, driver’s repair kit, roof racks and a first aid kit. The supply of these accessories is seen as separate from the supply of the motor car, and the VAT incurred may be deducted as input tax.

Modifications made to motor vehicles

A modification to a vehicle means an alteration to the engine or structure of the vehicle that does not result in the conversion of the vehicle from a passenger to a non-passenger vehicle or vice versa. An example would be to alter the vehicle’s physical appearance by adding a canopy to a double cab. The VAT incurred by a vendor on modification costs after acquiring a motor car may be deducted as input tax. VAT incurred by a vendor on modifications made by the supplier before the supply of the motor car cannot be deducted as input tax as the supply remains that of a motor car.

Converting a vehicle

A vendor that acquires a ‘motor car’ for which an input tax deduction is denied upon acquisition and subsequently utilises such vehicle for purposes for which an input tax deduction would have been allowed on acquisition may deduct input tax after the subsequent change of use of the motor vehicle.

There are also special rules for the conversion of vehicles into game-viewing vehicles and hearses. This converted game-viewing vehicle or hearse is deemed to be supplied to that vendor in the tax period that the conversion took place. The vendor will be allowed to claim an input tax equal to the tax fraction on the lesser of the adjusted cost or the open market value of that vehicle on the day before the conversion. Should this be the situation and, upon conversion of a vehicle, a vendor managed to claim an input tax deduction, the vendor would then be liable to declare output tax on the subsequent supply of the vehicle.

Transport in a game-viewing vehicle or hearse is subject to VAT at the standard rate.

The exceptions under the provisos to section 17(2)(c)

However, proviso (i) to section 17(2)(c) of the VAT Act determines that the prohibition on the claiming of input tax on the supply of a motor car does not apply “where the motor car is acquired by the vendor exclusively to make a taxable supply of that motor car in the ordinary course of an enterprise which continuously or regularly supplies motor cars, whether that supply is made by way of sale or under an instalment credit agreement or by way of a rental agreement at an economic rental consideration.”

There are thus several requirements that must be met before proviso (i) to section 17(2)(c) of the VAT Act will apply. The first requirement is that the vendor must acquire the motor car exclusively to make a taxable supply with the motor car. If the above condition is met, the further requirement that must be met is that the VAT vendor must carry on an enterprise in the ordinary course of which it continuously or regularly supplies motor cars. The final enquiry is whether the motor car is supplied through a rental agreement at an economical rental consideration.

Thus, the denial of input tax does not apply in the case of a vendor who is a car dealer, runs a car hire business at an economic rental, or regularly or continuously supplies motor cars as prizes to clients or customers (other than employees, office-holders or any connected person in relation to that employee, office-holder or vendor).

For example, if a taxpayer operates an auto body repair shop and purchases vehicles under lease agreements to be used by customers as courtesy cars. The customer’s insurance includes the courtesy cars, and the taxpayer, in effect, recovers the cost in their tax invoice to the insurance company.

For the proviso to apply, consideration should be given to the different requirements of this section. If a separate charge for the use of the motor car is not charged to the insurance company on the auto body repair company’s tax invoice, the argument for the deductibility of the input tax on the acquisition of the motor cars may be prejudiced. If a motor car is accordingly to any extent provided as a courtesy car for which no charge is levied, the proviso will not apply, and input tax on the acquisition of the motor car would be disallowed. If this is the manner in which the auto body shop operates its business, this requirement would probably be met. If all costs (direct and indirect) of supplying the motor car are covered in the recovery from the insurance company, the ‘economic rental consideration’ requirement would be met. If the motor cars are thus exclusively acquired for the purposes of supplying them to clients in respect of which an insurance company will cover the cost, it could be argued that the arrangement falls into proviso (i) to section 17(2)(c) of the VAT Act and that input tax may accordingly be recovered on the acquisition of such motor cars.

Prepared by CORE TAX