How does VAT work for leased cars and vehicle purchases?

Businesses commonly lease vehicles rather than buy them outright. The lease charges are subject to VAT, but this is not usually reclaimable, in full, by a business.

VAT on the purchase of cars

Many businesses mistakenly believe they can reclaim VAT on car purchases if they are business assets. However, other than in certain circumstances, you cannot reclaim VAT on the purchase of cars because VAT legislation specifically blocks recovery.

VAT can only be reclaimed if the car is unavailable for private use. Commuting to and from work is considered, by HMRC, to be private use. 

For VAT to be fully reclaimable, a company car must be kept at the business premises overnight, and employees or directors cannot use the car for personal purposes. In practical terms, this requires the vehicle to be insured for business use only and for employee contracts to specifically prohibit the private use of company cars.

What about VAT on 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 vehicle. 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. 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.

What is the VAT stance on cars leased 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.

Further VAT restrictions apply on the repair and fuel for these vehicles. 

Can I reclaim VAT on leased commercial vehicles? 

There is no restriction on reclaiming the full amount of VAT charged on the lease of a commercial vehicle.
For reclaiming VAT, HMRC defines a commercial vehicle as a road vehicle that is not a car. Examples include vans, lorries, and buses.

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