Paying and reclaiming VAT on the purchase of a car

Cars purchased for commercial purposes

Fleet cars

It is common for businesses to purchase cars for use by their employees to undertake various tasks of that business. This includes, for instance, minicab firms, and firms that operate out in the field such as sales companies and contract cleaning companies.

When cars are bought by an employer for use by their employees, it is important to know in what circumstances they can claim back Value Added Tax (VAT) on the purchase of these cars.

Are you purchasing a car or another commercial vehicle?

There is a distinction between cars and other commercial vehicles for the purposes of VAT, so you will need to establish what category the vehicle falls into. Factors which will be taken into account include the minimum weights of the vehicles and the availability of glazed and roofed accommodation behind the driver.

Certain vehicles which are viewed as commercial vehicles may fall within the definition of a car for VAT purposes, so it is always worth checking the specification prior to purchase – particularly if the VAT cost is a key factor for you.

Is VAT always required to be paid on the purchase of a new car?

VAT will always be payable on the purchase of a new car in the UK, or one which has been imported into the UK from overseas.

When can I claim back VAT on my car purchase?

If you are registered for VAT and ordinarily entitled to recover VAT, you can claim back the VAT costs incurred on the purchase of the car, together with any fitted accessories for that car. However, the car must be used exclusively for business purposes, ie. a genuine pool car for use by employees specifically for business purposes.

You may also be able to claim back all the VAT on a new car if it’s mainly used:

  • as a taxi;
  • for driving instruction;
  • for self-drive hire.

When will a car be used exclusively for business purposes?

A car will be used exclusively for business purposes when it is not used for private use at all (except in the course of a commercial leasing or rental operation). This includes travel to and from home (unless it’s a temporary place of work). You must be able to show that it is only for business use, for instance, by reference to the employee’s employment contract. This is quite a restrictive test to satisfy.

If I try to claim VAT on the purchase of car for business purposes is this likely to be challenged?

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For more information on:

  • Can VAT be claimed back for any other expenses?
  • Cars purchased for private purposes
  • Will I be charged VAT on a car purchased for private purposes?
  • Is this the case when I purchase a used car?
  • How will a dealer choose which method to employ?
  • Must the dealer inform anyone of which VAT system it is using?