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Reclaiming VAT on business vehicles

When you run a business, it is important to understand the VAT rules that apply to vehicles and motoring expenses. The amount of VAT that can be reclaimed depends on the type of vehicle, how it is used and whether any private use is permitted.

VAT-registered businesses can often reclaim VAT on qualifying vehicle-related purchases and expenses, but special restrictions apply to cars, fuel and mixed business/private use.

This guide explains the main VAT rules for commercial vehicles, cars and vehicle running costs, and highlights the factors you should consider before reclaiming VAT.

Buying a commercial vehicle

VAT can usually be reclaimed in full when a VAT-registered business purchases a commercial vehicle for business use.

Commercial vehicles typically include:

  • HGVs
  • tractors
  • vans
  • coaches.

Commercial vehicles are generally treated more favourably for VAT purposes than cars. Provided a vehicle is purchased for use in your business and the normal VAT recovery conditions are met, you can usually reclaim the VAT charged on the purchase. If you do so though, you will normally also need to charge VAT when you sell the vehicle.

Dual purpose vehicles

Some vehicles may appear similar to cars but are treated differently for VAT purposes. In certain circumstances, HMRC may classify these vehicles as commercial vehicles rather than cars, which can affect whether VAT is recoverable.

Examples can include:

  • car-derived vans
  • vans with rear seats
  • motorbikes
  • certain motorhomes
  • certain caravans.

The VAT treatment depends on the vehicle’s classification and how it is used within the business. Before reclaiming VAT, you should check that the vehicle meets HMRC’s conditions for VAT recovery.

Where a vehicle is treated as a commercial vehicle and the normal VAT recovery rules are satisfied, you can often reclaim VAT in full.

Buying a new car

VAT on the purchase of a car is normally blocked, which means you cannot reclaim it. However, you may be able to recover VAT in full if you buying a car that will be used exclusively for business purposes. HMRC applies a strict test when considering whether VAT can be reclaimed. Your business must be able to demonstrate that the car is not available for private use by employees, directors or business owners.

Examples where VAT recovery may be available include cars used:

  • as taxis
  • for self-drive hire
  • for driving instruction.

It is important to note that private use includes ordinary commuting between home and a permanent workplace. Travel between home and a temporary workplace may be treated differently.

Buying a used car

The VAT treatment of a used car depends on how the vehicle is sold. If the seller charges VAT and provides a valid VAT invoice showing the VAT separately, the VAT may be recoverable, subject to the normal rules governing VAT recovery on cars.

However, if you buy a car from a seller that uses the VAT Margin Scheme, you won’t be able to reclaim any VAT. Because under the scheme VAT is accounted for on the seller’s profit margin rather than the full price, no VAT is listed separately on the invoice. Consequently, there is no reclaimable VAT.

So, before reclaiming VAT on a used car, make sure that:

  • a valid VAT invoice has been provided;

  • VAT has been charged separately; and

  • the vehicle meets HMRC’s conditions for VAT recovery on cars.

Leasing a car

If you lease a car, its VAT treatment depends on whether its available for private use or not. If it is, and private use includes ordinary commuting, you can normally reclaim 50% of the VAT charged on the lease payments.

You can generally only fully recover VAT on lease payments if your leased car is used exclusively for business purposes and is not available for any private use.

Different rules may apply to other motoring expenses associated with the vehicle, such as fuel, repairs and maintenance.

Self-drive hire car

Different VAT rules can apply when a business hires a car rather than buying or leasing one. If you hire a replacement car because a company vehicle is unavailable, VAT recovery may be restricted. However, you can often reclaim all of the VAT on a short-term self-drive hire car where:

  • the vehicle is hired for no more than 10 days

  • it is used only for business purposes

  • it is not available for any private use.

As with all VAT claims relating to cars, you should retain appropriate records to demonstrate how the vehicle was used and the VAT recovery conditions met.

Reclaiming VAT on fuel

If fuel is used exclusively for business purposes and there is no private use, you can normally reclaim all of the VAT. However, if fuel is used for both business and private journeys, you will need to choose one of the following approaches to reclaiming VAT paid on fuel, unless you use the Flat Rate Scheme:

  • Reclaim all of the VAT and apply a fuel scale charge: this allows you to recovery VAT on all the fuel you purchase, by adding an additional VAT charge to your VAT Return to reflect your private journeys.
  • Reclaim VAT only on business fuel: this requires you to keep accurate mileage records, and then calculate and reclaim only the VAT relating to business journeys.
  • Do not reclaim any VAT on fuel: this may be the simplest option if your business mileage is low and the paying a fuel scale charge would outweigh any VAT recovery.

Whichever method you choose, you’ll need to apply it consistently across all the vehicles within your business.

Summary

The amount of VAT you can reclaim on a vehicle depends on the type of vehicle, how it is used and the specific VAT rules that apply.

Commercial vehicles often qualify for full VAT recovery where they are used for business purposes, whereas cars are subject to much stricter rules. Separate rules may also apply to leased vehicles, hired vehicles and fuel costs.

Therefore, before reclaiming VAT, make sure that:

  • the vehicle qualifies for VAT recovery under HMRC rules

  • you have appropriate documentation as evidence of VAT paid

  • any private use restrictions have been considered.

For more information about calculating VAT, use our online VAT Calculator.