Cars and motoring expenses: reclaiming VAT

When you buy a car you generally can't reclaim the VAT. There are some exceptions - for example, when the car is used mainly as one of the following:

  • a taxi
  • for driving instruction
  • for self-drive hire

If you lease a car for business purposes you'll normally be able to reclaim 50 per cent of the VAT you pay. But you can reclaim 100 per cent of the VAT if the car is used as one of the following:

  • exclusively for a business purpose
  • a taxi, for driving instruction or self-drive hire

You can reclaim all the VAT charged on vehicle repairs and maintenance so long as:

  • your business pays for the work
  • there is some business use of the vehicle

You can generally recover the VAT on all other business motoring expenses like fleet management or off-street parking. There are special rules for reclaiming VAT on road fuel used for business purposes.

This guide tells you more about reclaiming VAT on cars and motoring expenses.

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Reclaiming VAT when you buy a car

Generally you can't reclaim the VAT when you buy, import, or in some other way acquire a car. But there are some exceptions to this. You can reclaim all of the VAT if you meet one of these conditions:

  • The car will be used exclusively for business purposes and you can show that it's not available for private use by your employees or anyone else. For example, your employees' contract of employment excludes private use including travel from home to the place of work.
  • You intend to use the car mainly as a taxi, a driving school car or a self-drive hire car.
  • You're a car dealer and the car will be part of your 'stock in trade' that you intend to sell within the next 12 months.

Check when you can reclaim VAT if you're a car dealer

Used cars

You might buy a used car from a dealer who sells it to you under the Margin Scheme for second-hand vehicles. The invoice you get won't show any VAT, so you can't reclaim any, no matter what you intend to use the car for.

If your invoice does show VAT then the car won't have been sold under the Margin Scheme. Unless the car meets one of the above conditions for reclaiming VAT, you won't be able to recover the VAT included on the invoice.

Commercial vehicles

You'll normally be able to reclaim the VAT on a commercial vehicle like a panel van or truck that you buy for use in your business, so long as you follow the normal rules for reclaiming VAT.

Find out what's classed as a car or commercial vehicle

Accessories

If you buy a car and you can't reclaim the VAT on it, you can't reclaim the VAT on any accessories that are fitted to it at the time of purchase either. This is because the accessories are considered to be part of a single supply of the car - for which the VAT can't be reclaimed.

If you later buy an accessory for a car that's owned by, or used in the business, you can only reclaim the VAT if the accessory has a business use.

Private use of a car bought for business use

If you were able to reclaim the VAT when you bought a car it's important to monitor how the vehicle is used. You'll have to account for and pay VAT - output tax - on the 'current value' of the car if it's no longer:

  • used exclusively for business purposes
  • used mainly as a taxi, driving school car or hire car (for example, its use as a taxi is less than 50 per cent of its total usage)
  • a stock in trade car

The current value is the current purchase price of an identical or similar model.

More about accounting for VAT when you use something privately

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Reclaiming VAT when you lease or hire a car

Leased cars

If you lease a car for business use you'll normally be able to reclaim only 50 per cent of the VAT. This is because HM Revenue & Customs (HMRC) considers that there'll be some private use of the vehicle.

But sometimes this 50 per cent limit doesn't apply. You can reclaim all the VAT if the leased car is any of these:

  • a taxi that's hired out with a driver
  • a driving school vehicle
  • a self-drive hire car
  • a car on which input tax has been blocked at an earlier stage
  • exclusively for business use

Self-drive hire cars

If you hire a car just to replace a company car that's off the road, then you'll only be able to reclaim 50 per cent of the VAT on the hire charge.

But if you hire a car for another reason - perhaps you don't have a company car - then you can reclaim all the VAT so long as both of the following apply:

  • you hire the car for no more than ten days
  • you use it specifically for your business

VAT when you sell a car or end a lease

You'll need to consider the VAT position if you:

  • sell a car on
  • end a lease agreement early

VAT when you sell a car

You might decide to sell a car for which you were able to reclaim VAT - perhaps a pool car or a driving school vehicle. You'll have to charge VAT on the full selling price of the car and issue a VAT invoice to a VAT-registered buyer if they ask for one. You can't sell the car under the Margin Scheme for second-hand vehicles.

If you couldn't reclaim the VAT on the original purchase price of a car you bought new, you won't have to charge any VAT when you sell it - not even on your margin. This is because the sale of the car is exempt for VAT purposes.

If you bought a used car under the Margin Scheme for second-hand vehicles - this will be clearly indicated on the invoice - and you sell it for less than you purchased it for, no VAT is due. If you sell it for a profit, you can either charge VAT on the full sale price, or you can use the Margin Scheme and charge VAT only on the excess of the sale price over your purchase price.


Read about the second-hand Margin Scheme

VAT when you end a lease early

If you end a car leasing agreement early, you'll generally have to make a termination payment to your leasing company. You may also be entitled to a rental rebate. The leasing company can choose to treat both the termination payment and the rebate as either:

  • taxable for VAT purposes
  • outside the scope of VAT

If they choose to treat them as taxable, they'll generally set the amount of the rental rebate due to you against the amount of the termination payment and send you a VAT invoice for the difference. You can reclaim the full amount of the VAT even if you were only reclaiming 50 per cent of the leasing charges. This is because the termination payment isn't a rental charge.

If it turns out that the rental rebate due to you is more than the termination payment, the leasing company will send you a VAT credit note for the difference. If you were only getting back 50 per cent of the VAT on the leasing charges you can put through to your VAT account only 50 per cent of the VAT shown on the credit note.

Find out about keeping a VAT account

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Reclaiming VAT on repairs and maintenance

You can reclaim all the VAT you're charged on repairs and maintenance to a vehicle so long as:

  • the vehicle is used to some extent for business purposes
  • the business pays for the work to be done

It doesn't matter if the car is used for private motoring or if you've decided not to reclaim the VAT on road fuel for business travel.

But you can't reclaim the VAT on vehicle repairs and maintenance if you use the vehicle only for your own private motoring.

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Reclaiming VAT on other motoring expenses

You can generally reclaim the VAT you pay on all other business motoring expenses - like fleet management charges and off-street parking.

Remember that if you use your car for both business and private motoring you'll only be able to reclaim the VAT on the proportion that relates to business use.

Get information on apportioning VAT in a mixed business-private use

Car parking charges

Some car parking charges, for example in multi-storey car parks, include VAT at the standard rate. Other car parks may or may not include VAT - you'll have to check with the provider, or the receipt may indicate if VAT was charged - but there's no VAT on on-street parking meter charges.

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Reclaiming VAT on road fuel

If your business pays for road fuel, you can deal with the VAT charged on the fuel in one of four ways:

  • Reclaim all of the VAT. You must use the fuel only for business purposes.
  • Reclaim all of the VAT and pay the appropriate fuel scale charge - this is a way of accounting for output tax on fuel that your business buys but that's then used for private motoring.
  • Reclaim only the VAT that relates to fuel used for business mileage. You'll need to keep detailed records of your business and private mileage.
  • Not reclaim any VAT. This can be a useful option if your mileage is low and also if you use the fuel for both business and private motoring. If you choose this option you must apply it to all vehicles including commercial vehicles.

Get information on apportioning VAT in a mixed business-private use

Find out current and historical fuel scale charges

Flat Rate Scheme

If you're on the Flat Rate Scheme, the VAT on your fuel usage is already taken into account in the flat rate percentage for your sector. You don't claim back any VAT on fuel, and you don't use the fuel scale charge to pay VAT on fuel used for private motoring.

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Reclaiming VAT on insurance claims

If you have an insurance claim that involves goods or services that are liable for VAT, you'll normally be invoiced directly for the VAT element if you're VAT-registered. For example, a garage that carries out repair work on your car will invoice the insurance company for the cost of the work and parts excluding VAT. They'll invoice you separately for the VAT.

You can reclaim all the VAT on this invoice so long as the car is used for business purposes to some extent. This is because the work that's been done is part of the cost of running and maintaining your vehicle.

As part of settling your claim, your insurance company might supply you with other items apart from the repair work. For example, they may replace an accessory that was stolen or damaged. In some circumstances they might give you an invoice for the VAT on the item. You can only reclaim the VAT on the replacement if you were able to reclaim the VAT on the original purchase.

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More useful links

Find out more about cars and motoring expenses in VAT Notice 700/64

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