Customs & Excise has announced the change, which will affect manufacturers, car dealers and fleet operators and follows infraction proceedings taken by the European Commission against the Italian Republic and have led to a change in the legal definition of motor cars used for VAT purposes.
Steve Holloway, director of VAT in Deloitte & Touche's Birmingham office, said: 'Where a business has not been able to recover any VAT on goods, the subsequent disposal of those goods is exempt from VAT. The changes will not only impact on the treatment of business cars but also, for example, goods used for business entertainment.
The bad news for fleet operators is that the disposal of cars on which VAT recovery was blocked will now be exempt from VAT. This means any VAT incurred in selling cars, such as valeting or auction fees, will potentially be irrecoverable. In addition, the value of the cars sold may have to be taken into account in partial exemption calculations.