VAT on leased cars and commercial vehicles

It is common for businesses to lease vehicles rather than buy them outright. VAT is charged on leases for vehicles but it is rare that this VAT can be reclaimed, in full, by a business.

VAT on car leasing

Reclaiming VAT on the purchase of cars is specifically blocked by VAT legislation.

Many businesses think that VAT can be reclaimed on the purchase of a company cars because they are assets of the business. However, VAT is only reclaimable if the car in question is not available for private use.

This means that a company car must be kept on at the business premises overnight and employees/directors must not be in a position to be able to use the car for private use. In practical terms this means that the car should be insured for business use only or employee contracts specifically prohibiting the private use of company cars.

But what about leased cars?

There is a 50% block on reclaiming the input tax on leased cars. The 50% block is to cover the private use of the car. The remaining 50% can be reclaimed subject to the normal rules on reclaiming input tax.

The 50% block also applies to hire cars if the car is hired to replace an off the road company car. Only 50% of the VAT can be reclaimed on the cost of hiring a car and this applies to the entire hire period.

VAT incurred on the hire of a car specifically for business, for reasons other than to replace an off the road company car, can be reclaimed in full if the hire period is no more than 10 days.

VAT and cars leased primarily for use as taxis or for driving instruction.

There is no 50% restriction on VAT charged on the lease of a qualifying car intended for use primarily as a hire with a driver for carrying passengers or for providing driving instruction. The VAT on the lease hire can be reclaimed in full.

VAT and leasing commercial vehicles

There is no restriction on reclaiming the full amount of VAT charged on the lease of a commercial vehicle.

For the purposes of reclaiming VAT, HMRC define a commercial vehicle as a road vehicle which is not a car. Examples include vans, lorries, and buses.

A VAT inspection from HMRC will almost certainly involve a check on whether VAT has been correctly reclaimed on vehicle leases so it is important to ensure that business vehicles on which the full amount of VAT has been reclaimed are not cars for VAT purposes.