Reclaiming VAT on Cars

Cars can be expensive, so if you are buying a new business car then it’s worth understanding whether you can reclaim VAT you have paid.

In this article, I’ll look at different scenarios and explain the HMRC rules around how much VAT can be claimed back for each as well as the impact of personal use.

Is there VAT on Cars in the UK?

When you buy a new car or second-hand car from a dealership, then most likely they will add VAT onto the amount you pay. That’s because as a business they’ll be required to register for VAT when their turnover reaches the VAT threshold, currently £85,000.

If you buy a car from a private seller then most likely you will not have paid VAT because they won’t be registered with HMRC for VAT.

You’ll need to check your invoice to find out whether you have paid VAT on the purchase of your car.

The rules around VAT are different for each, basically affected by whether what you use the car for and if there is any personal use.

How to Reclaim VAT on Cars

In reality, HMRC lets you claim back VAT but the amount will depend on how the car was purchased, in other words, whether it is new, used or leased.

New Car Purchases

You can reclaim all the VAT on a new car purchased if it is for business purposes only.

It’s all or nothing.

So if you use the car for any portion of personal travel, no matter how small, you cannot get back any of the VAT.

It does mean that in reality, only very few businesses manage to claim any VAT on new cars. Those that do manage to claim VAT back have to prove there is absolutely no personal use of the vehicle, for example by:

  • Specifying no personal use in an employees contract;
  • Requiring the vehicle is returned to your business premises overnight.

Personal use includes travel between home and work (unless it is a temporary place of work).

Despite these rules there are certain jobs that require a vehicle. You may be able to claim all the VAT on a new car if it’s mainly used:

  • as a taxi;
  • by a driving instructor;
  • for self-drive hire.

Although the term “mainly” remains undefined by HMRC, it is generally taken that this means at least 50% of the time.

Car Leases

In most cases, you can claim 50% of the VAT you pay on leasing a car, even if it is available for private use. You may be able to claim back all the VAT paid on the lease if you can prove:

  • the car is used for business reasons only;
  • you are a taxi driver;
  • you are a driving instructor.

Second Hand Cars

As with VAT on new cars, you can claim back any VAT you have paid if the car is used for business purposes only. The purchase invoice will show how much VAT you have paid when you bought the car.

Make sure you check the invoice though as some used car dealers operate under the VAT margin scheme which means no VAT will be added to the price.

Hired Cars

If you need to hire a car because your normal company car is off the road, then in most cases you can claim back 50% of the VAT paid on the hire.

If you hire a car for any other reason and don’t have a company car, then you can get 100% of the VAT back if:

  • you hire for no more than 10 days;
  • it is for business reasons only with absolutely no private use.

Remember private use includes driving from home to your place of work (unless it is a temporary location).

Commercial vehicles

Commercial vehicles include:

  • Lorries;
  • Trucks;
  • Tractors.

Similar to cars, you can claim back 50% of the VAT paid on commercial vehicles if it is used for both business and privately.

And again you may be able to claim for a 100% of the VAT if you can prove:

  • it is used for business reasons only with absolutely no private use;
  • you are a taxi driver;
  • you are a driving instructor.

Reclaiming VAT on Vehicle Expenses

Generally, you can reclaim VAT and get tax relief on most of the vehicle expenses paid for company cars or those leased by the business, even if you cannot claim VAT back on the initial car purchase. That includes vehicle expenses like:

  • Fuel;
  • Maintenance;
  • Street parking;
  • Car tax;
  • Insurance;
  • Accessories added at a later date;
  • MOT.

If you need help with reclaiming VAT on Cars and Fuel then call the HMRC VAT Helpline on 0300 200 3700.

Is there VAT on Vehicle Tax?

No there us no VAT added to vehicle tax, otherwise that would be tax on tax.

What is a VAT Qualifying Car?

A VAT qualifying car is one that your business has claimed back input VAT on the purchase price in full. In reality these will be cars sold by dealerships rather than private sellers and have a tax invoice as evidence of the transaction.

New Here? Learn how to set up the financial side of your business with these easy to understand guides and resources:

  • Sole Trader or Limited Company? – Download my free calculator to check which business structure would help you to pay less tax;
  • Tax Records and Bookkeeping – Understand what tax records you’ll need to keep and how to set up your own bookkeeping system;
  • Self Employment Taxes Explained – Learn what taxes you’ll pay, how much and when;
  • VAT Guides – From registration to de-registration, VAT schemes and thresholds, these guides will take you through the basics every UK small business owner needs to know;
  • Invoice Template – Free template and step-by-step guide so you can get paid by your clients.
Anita Forrest
About Anita Forrest

Anita Forrest is a Chartered Accountant, spreadsheet geek, money nerd and creator of - the UK small business finance blog for the self-employed community. Here she shares simple, straight-forward guides to make self-employment topics like taxes, bookkeeping and banking easy to understand.