VAT on Vehicles

Input Tax on Cars

The general rule is that VAT incurred on the purchase of a car cannot be reclaimed as input tax. This is one of the most significant input tax blocks in the VAT system and catches many businesses by surprise.^[1]

The block applies whenever the car is available for any private use, which includes:

• Commuting between home and a permanent workplace
• Any personal journeys by employees, directors, or partners
• Even the theoretical possibility of private use

Exceptions to the Car Block

You can reclaim input VAT on a car in two limited circumstances:^[1]

• 100% business use — the car is used exclusively for business purposes with absolutely no private use. This is extremely difficult to demonstrate in practice, as HMRC interprets it strictly.
• Stock in trade — the car is purchased by a motor dealer or leasing company for resale or hire. The car must not be used for any other purpose before being sold or leased.

Businesses such as driving schools and taxi firms that use cars exclusively for business can reclaim the VAT, but they must be able to prove there is genuinely no private use.

Vans and Commercial Vehicles

Unlike cars, VAT on the purchase of vans and commercial vehicles can be reclaimed in full, provided the vehicle is used for taxable business purposes.^[3]

HMRC generally accepts a vehicle as a van if it is:

• Primarily designed for carrying goods
• Has a gross vehicle weight of 3.5 tonnes or less
• Has a payload area that is larger than the passenger area

Double-cab pickups with a payload of 1 tonne or more are treated as vans for VAT purposes. Pickups with a lower payload are treated as cars and subject to the input tax block.

VAT on Leased Vehicles

When a business leases a car, the VAT treatment depends on whether the car is available for private use:^[3]

The 50% restriction on car leases is a flat-rate block — it does not matter whether actual private use is 5% or 95%. If any private use exists, you can only reclaim half the VAT on the lease payments.

Fuel Scale Charges

Businesses that reclaim VAT on all fuel purchases — including fuel used for private motoring — must account for output VAT using HMRC’s fuel scale charges.^[2]

The scale charge is a fixed amount of deemed output tax based on the vehicle’s CO2 emissions. It is designed to recover the VAT element of private fuel use. HMRC publishes updated scale charge tables quarterly.

A business has three options for dealing with fuel VAT:

• Option 1: Reclaim all fuel VAT and pay the fuel scale charge — simplest, but may cost more than the actual private use
• Option 2: Only reclaim VAT on fuel used for business journeys — requires detailed mileage records
• Option 3: Do not reclaim any fuel VAT — simplest but most costly

Selling a Vehicle

The VAT treatment when selling a vehicle depends on whether input VAT was reclaimed on the original purchase:^[3]

• If input VAT was reclaimed (e.g. a van or 100% business car), the sale is a standard-rated supply and you must charge VAT on the selling price
• If input VAT was not reclaimed (e.g. a car subject to the input tax block), the sale is outside the scope of VAT and no VAT is charged
• Motor dealers can use the Margin Scheme to charge VAT only on their profit margin when selling second-hand vehicles bought without VAT

Electric Vehicle Charging

VAT on electricity used to charge electric vehicles for business purposes can be reclaimed as input tax. Workplace charging provided by an employer is treated as a VAT-free benefit for the employee — there is no output VAT to account for on the electricity.

If an employee charges a company electric vehicle at home, the business can reimburse the cost of electricity. HMRC’s advisory electricity rate (AER) for fully electric cars is 7p per mile (2025/26), and no fuel scale charge applies to electric vehicles.

Further Reading

• Output VAT vs Input VAT — understanding the basics of input tax recovery
• VAT Margin Scheme — paying VAT only on profit margins for second-hand goods
• VAT Flat Rate Scheme — simplified VAT accounting for smaller businesses