As a business, how much VAT, if any, can you claim back on leased cars, vans and other vehicles, and on all those associated expenses? The official guidelines can be difficult to grasp. Here's our Aben Bookkeeping clear, common sense guide to all things VAT and vehicle lease-related.
When you can and can't reclaim VAT on business vehicles
If you are VAT registered and buy a car, you can't usually reclaim the VAT. Leasing a car for business means you can reclaim a generous 50% of the VAT paid. When the vehicle is used exclusively for business, for example a taxi cab, driving school car or self-drive hire vehicle, you can reclaim 100% of the VAT - but bear in mind it's your job to provide the proof.
Vehicle repairs and maintenance also come with the potential to reclaim VAT as long as the business pays for the work and the vehicle is used for business at least some of the time. You can also claim back the VAT on business motoring expenses like fleet management and off-street parking. And there are special VAT reclaim rules on the fuel used for business.
About VAT and the private use of a car bought for business
If you reclaimed VAT when you bought a car for business, you need to monitor how the vehicle is used going forwards. If you stop using it exclusively for business you will have to pay VAT, AKA output tax, on the car's current value. This applies when you no longer use the car 100% for business. As a general rule, the limit falls at 'less than 50%' business use.
Reclaiming VAT on leased or contract hire vehicles
If you lease or hire a car for business you should be able to claim back half the VAT you've paid, simply because HMRC treats it as though there's some private usage. On the other hand there are exceptions, where you can claim back all the VAT you've paid. Namely when the vehicle is either a cab hired with a driver, self-drive, used for driving school purposes, a vehicle where input tax has been was been blocked at an earlier stage, or where it is genuinely and exclusively used for business.
What about short term business vehicle hire?
Imagine you need to hire a vehicle to stand in for a company car that's being repaired. In that case you can claim back half of the VAT on the cost of the hire. On the other hand when you hire a vehicle for another reason, maybe because you don't have a company car, you can get all the VAT back under certain circumstances: if you hire it for ten days or less, or use the car specifically for business.
What about selling a car?
You've reclaimed the VAT on a car used for business. What happens when you sell it? You'll need to charge VAT on the full selling price and also issue a VAT invoice to the buyer if they're VAT registered and ask for one. On the other hand, assuming you didn't reclaim any VAT when you bought the vehicle, you don't have to charge VAT when it's sold because the car is VAT exempt under these circumstances.
What happens when you end a lease early?
If you end a lease or contract early, there's usually a special termination payment to make to the leasing company. You might get a rental rebate too, depending on whether or not the leasing company treats it as taxable for VAT. They might, they might not. If it's VAT-able, they will offset your rental rebate against your termination payment and send a VAT invoice for the difference. This means you're able to reclaim all the VAT even if you only claim back half of the leasing charge, simply because a termination payment is different from actual rental.
What about VAT reclaims on fuel, repairs, maintenance and expenses?
It's good to know you can claim back 100% VAT on repairs and maintenance as long as the vehicle has been used for business and your business is paying for the work. It's immaterial whether or not you've used the vehicle privately, or if you decided not to claim back the VAT on petrol or diesel used for business.
You can usually claim back the VAT paid on fleet management and off-street parking, but if you use the car for business and privately you can only claim the VAT back on the amount relating to the business. Some car parks include VAT, others don't. It's your responsibility to check with the car park you use. Bear in mind there's no VAT on meter parking.
VAT gets complicated where fuel used for business is concerned. You may be able to claim back all the VAT as long as it has only been used for business. You might be able to reclaim all the VAT and pay a fuel scale charge, a goo way to account for the output tax on fuel bought for business but used privately. You could find yourself only claiming back the VAT that relates to fuel used for business, in which case you'll need to keep detailed records. Or you might not claim back any VAT at all, a handy choice when your mileage is low or you use the fuel for business and privately – in which case you have to apply the rule to every vehicle, including commercial ones.
What if you're on the VAT flat rate scheme?
Flat Rate Scheme membership means the VAT on your fuel is already accounted for. In this case you don't have to claim VAT on your fuel, ignoring the fuel scale charge to pay VAT on diesel or petrol used privately.
Simple... but is it simple enough?
We've tried to make the rules around VAT reclaims and business motoring as simple as we can. But with the best will in the world, it's still a complex matter. Luckily we understand VAT inside out and upside down. If you'd feel safer letting the experts take control, get in touch and we'll be delighted to help!
If you'd like to talk to us about the amount of VAT you can reclaim on your leased company vehicle contact us on
01273 661913 or e-mail email@example.com