VAT on Company Cars

A business normally cannot reclaim the VAT on buying a company car. The block is lifted only where the car is genuinely unavailable for private use, or where it is stock in trade, a taxi, a self-drive hire car or a driving school car. Leasing is different: half of the VAT on the lease charge is recoverable. Repairs and fuel follow their own rules and are far more generous than most directors expect.

That first paragraph is the whole answer, and almost every reader who arrives here believes at least one part of it is wrong. The most common belief, and the most expensive, is that a car bought through the business and driven only on business journeys carries recoverable VAT. It does not, and the reason is the single most valuable point on this page. The rule turns on whether the car is available for private use, not on whether anybody actually made a private journey in it.

The rule: the input tax block on cars

The block sits in secondary legislation, not in the VAT Act itself. Article 7 of the Value Added Tax (Input Tax) Order 1992 (SI 1992/3222) provides that tax charged on the supply, including a letting on hire, to a taxable person of a motor car "shall be excluded from any credit under section 25 of the Act".

Read the structure of that sentence, because it decides everything that follows. The default is exclusion. VAT on a car is not input tax at all unless something in the rest of article 7 brings it back in. This is not a reasonableness test, a proportion test or an apportionment. There is no route to recovering 60% of the VAT on a car because 60% of the mileage was business. It is on or off, and it starts off.

Article 7(2) then sets out the cases where the tax comes back into credit. In broad terms they cover a qualifying motor car that is unused and supplied to a motor dealer as stock in trade, a car supplied to a person who will let it on hire, and a car intended for one of the qualifying uses. Article 7(2E) and 7(2F) define those qualifying uses: hire with a driver for the purpose of carrying passengers, self-drive hire, and driving instruction. Separately, and this is the limb everybody reaches for, the block does not apply where the car is intended to be used exclusively for the purposes of a business carried on by the taxable person.

Every argument a business has about reclaiming VAT on a company car ends up at that last limb. And that last limb has a trapdoor built into it.

What counts as a "car" for VAT

Before the block can apply, the vehicle has to be a car in the VAT sense, which is not the same as a car in ordinary speech or a car for benefit in kind purposes. HMRC's definition in VAT Notice 700/64 is that a car is any motor vehicle of a kind normally used on public roads which has three or more wheels and either:

• is constructed or adapted mainly for carrying passengers, or
• has roofed accommodation to the rear of the driver's seat that is fitted with side windows.

The exclusions matter more than the definition, because they are where recoverable VAT actually lives:

• Vehicles accommodating only one person, or twelve or more people including the driver.
• Caravans, ambulances and prison vans.
• Vehicles of not less than three tonnes unladen weight.
• Special purpose vehicles, including ice cream vans, mobile shops, hearses, bullion vans and breakdown recovery vehicles.
• Vehicles with a payload of one tonne or more.

That last line is the one that pays. It is what takes most conventional vans, and a good number of van derived and double cab vehicles, outside the VAT definition of a car altogether. If the vehicle is not a car, article 7 has nothing to bite on, and the VAT on the purchase is ordinary input tax recoverable under the normal business use rules.

One warning. The one tonne payload test is a VAT test and only a VAT test. The classification of the same vehicle for employment tax purposes follows a different set of rules that changed for double cab pickups from April 2025. Do not assume that a vehicle treated as a van in one system is treated as a van in the other, and do not let a supplier's sales copy make that assumption for you.

The availability trap: why "I only use it for work" is not the test

This is the paragraph to read twice. The exclusive business use limb of article 7 is not satisfied by evidence of how the car was driven. It is defeated by the mere possibility that it could be driven privately.

Article 7(2G) is explicit:

"A taxable person shall not be taken to intend to use a motor car exclusively for the purposes of a business carried on by him if he intends to let it on hire for inadequate consideration or make it available to any person for private use, whether or not for consideration."

Note the three things that sentence does. It attacks intention, so it applies at the moment of purchase and cannot be cured later by good behaviour. It says any person, so a director's spouse, an employee or a family member all count. And it says whether or not for consideration, which closes the obvious escape route of charging a nominal hire fee for private journeys.

HMRC's practical wording in Notice 700/64 is shorter and harder: "A car is available for private use when there's nothing preventing you or your employee from using the car for private use." The word doing the work is preventing. Not discouraging. Not recording. Preventing.

So the question an inspector asks is never "did you drive it privately?" It is "what stopped you?" A car parked on a director's driveway overnight, insured for social domestic and pleasure use as well as business, with the keys in the house and no written restriction anywhere, has nothing preventing private use. The reclaim fails, and it fails even if the mileage log is immaculate and genuinely shows nothing but business journeys. The log answers a question nobody asked.

Businesses that do satisfy the test usually look the same. The car is kept at the business premises overnight. The insurance is restricted to business use. There is a written policy prohibiting private use, and it is real rather than decorative. Keys are held at the premises rather than by an individual. Mileage is logged. None of those on its own is decisive, and HMRC treats the overnight home keeping point as strong evidence against the claim, but together they are the difference between an arguable position and a hopeless one.

The practical consequence is worth saying plainly. For most owner managed businesses buying an ordinary car, the correct answer is that the VAT is not recoverable, the accounting entry is the full VAT inclusive price, and the cost recovery route is capital allowances rather than a VAT reclaim. Our guide to writing down allowances on cars covers that side of it: that page answers how the cost is relieved against profits, which is a different question from whether the VAT comes back.

The exceptions that genuinely lift the block

Five routes take a car out of the block. Four of them are trade specific and the fifth is the exclusive business use test already covered.

Stock in trade

An unused car supplied to a motor dealer or manufacturer as stock in trade carries recoverable VAT. This is the exception that lets the motor trade function at all. Note it depends on the car being held for resale in the ordinary course of the business, not on the business happening to be a garage. A dealership buying a car for the proprietor to drive is not buying stock in trade, and the ordinary block applies.

Taxi and private hire

A car intended for hire with a driver for the purpose of carrying passengers is a qualifying use under article 7(2E). That covers licensed taxi and private hire work. It does not cover a car that happens to carry a passenger occasionally.

Self-drive hire

Cars provided on self-drive hire qualify, broadly where the hire periods are short. Article 7(2F) frames this in terms of the vehicle not being hired to the same person for a continuous period of around thirty days, nor for more than around ninety days in a twelve month period. Longer arrangements start to look like the provision of a car rather than a hire business.

Driving instruction

A car intended for use in providing driving instruction is a qualifying use. A driving school buying a dual control tuition car is on the clean side of the line.

Exclusive business use

The general test, defeated by availability as set out above. In practice this is a pool car test.

Blocked and recoverable, side by side

Blocked, no input tax	Recoverable input tax
A garage buys a car for the owner and it is kept at home overnight with the keys available: blocked, art. 7(2G).	The same garage's recovery truck, or a van with a payload of one tonne or more: not a car for VAT, so recoverable.
A salon buys a car for the owner's business travel with no written bar on private use: blocked.	A driving school's tuition car used for driving instruction: art. 7(2E) qualifying use, recoverable.
A florist's delivery car that staff can take at weekends: blocked, because it is available.	A florist's pool car kept at the shop, insured for business use only and never taken home: recoverable, subject to holding the evidence.
A taxi firm buys a car on a margin scheme invoice: nothing to reclaim, because there is no VAT on the purchase.	A taxi firm buys a VAT qualifying car for hire with a driver carrying passengers: recoverable.
A cafe leases a car available for the owner's private use: 50% of the VAT on the lease charge is blocked.	The separately invoiced maintenance element of that same lease: recoverable in full.
Fuel put to private use where the business neither applies a scale charge nor splits its mileage.	Repairs, servicing, tyres and MOT work on a business used car: recoverable in full regardless of private motoring.

Leasing: the 50% position

Leasing is the one place where a partial answer exists. Where a car is leased and is available for private use, 50% of the VAT on the lease charge is blocked and the remaining 50% is recoverable under the normal rules. The 50% is a fixed proxy for private use. It is not an apportionment you calculate, and it does not move because the private use is heavier or lighter than average.

The restriction applies to all the VAT on charges paid for the rental of the car under the terms of the leasing agreement. That includes optional services, unless they are supplied and identified separately from the leasing supply on the tax invoice, and it includes an excess mileage charge where that forms part of the leasing supply. Maintenance supplied and invoiced as a genuinely separate supply escapes the block and its VAT is recoverable in full.

The practical lesson is about invoicing. A lease invoice showing a single inclusive monthly figure hands 50% of all of it to the block. The same arrangement with the maintenance element separately supplied and separately identified recovers that element in full. Our dedicated guide to VAT on leased cars works through the restriction in detail, including where the boundary between the leasing supply and a separate supply actually sits.

One citation note, deliberately: this page cites Notice 700/64 and article 7 generally for the 50% restriction rather than quoting a specific sub-article number, because the amending provision delivering the 50% figure was not isolated in our source verification.

Repairs, maintenance and accessories

Here the news is good, and it is routinely missed. VAT on repairs, servicing, tyres, MOT work, parts and accessories for a vehicle used for business is recoverable in full where the business pays for the work, and the existence of private motoring does not cut it down.

That sits oddly next to a purchase on which no VAT at all was recoverable, and that is exactly why businesses get it wrong. They reason that because the car was blocked, everything attached to the car must be blocked too, and they never claim the repair VAT. Over the life of a car, on a vehicle doing real mileage, that is a meaningful sum surrendered for no reason.

The 50% restriction described in the leasing section applies to lease charges. It does not spread to repair invoices.

Fuel: the road fuel scale charge

Fuel is the third distinct regime on the same vehicle. Where a business buys road fuel that is then put to private use, it has three options.

1. Recover nothing. Simple, and often the right answer for a business with one car and light mileage.
2. Split the mileage. Keep detailed records and recover only the business proportion of the fuel VAT.
3. Use the road fuel scale charge. Recover all the VAT charged on road fuel, and account for output tax through a flat rate charge instead of splitting mileage.

The scale charge is worked out on a flat rate basis according to the car's carbon dioxide emissions. Where the CO2 figure is not a multiple of five it is rounded down to the next multiple of five, and the charge also varies with the length of the VAT accounting period, so there are separate annual, quarterly and monthly figures. The amounts are period dated and are republished by HMRC, so take them from the live VAT road fuel scale charges table rather than from any figure quoted in an article, including this one. We do not publish a scale charge amount here for that reason.

The choice is all or nothing across the fleet. HMRC's position is that if you opt to use the scale charge you must use it for all cars in which your business fuel is made available for private use. You cannot scale charge the heavily private car and mileage split the rest.

On electric cars, be careful. The published scale charge tables are expressed by CO2 emissions band and cover petrol and diesel vehicles, and HMRC does not state expressly on those pages what happens for a fully electric car. We do not publish a position on that question; check HMRC's current guidance. What is settled is that an electric car is still a car for article 7, so there is no VAT advantage on the purchase. Charging is a separate subject with its own rules, covered in our guide to VAT on electric cars.

Worked examples

A garage buys a car for the director, and a van instead

A garage buys a car for £24,000 including £4,000 of VAT. The director takes it home each night. It is insured for social use as well as business and there is no written bar on private journeys.

Recoverable VAT: nil. The car is available for private use, so article 7(2G) defeats the exclusive business use test before the mileage log is even opened. The whole £24,000 is the cost of the car and goes into the capital allowances computation.

Now the same £24,000 spent on a van with a payload of one tonne or more. The vehicle is not a car for VAT, so article 7 does not apply. The £4,000 is ordinary input tax and is recoverable, subject to business use. Same money out of the bank, £4,000 difference in the VAT position, decided entirely by the payload plate.

A quarter of running costs on one business used car

A florist runs one car that is used for business and is also available privately. In the quarter the business pays £480 including VAT for servicing, two tyres and an MOT, and buys road fuel on the business card.

The £480 carries £80 of VAT at the standard rate of 20%. That £80 is recoverable in full, and the private motoring does not reduce it. On the fuel, the business has opted for the road fuel scale charge, so it recovers all the VAT on the fuel it bought and accounts for output tax on the scale charge for the car's CO2 band, taking the amount from the current HMRC table. It does not need a business and private mileage split to do this, but because it has opted in, it must apply the scale charge to every car in which business fuel is made available for private use.

What people get wrong

• Treating actual use as the test. The mileage log is not the answer to the availability question. Nothing preventing private use means blocked, however the car was driven.
• Believing a nominal charge fixes it. Article 7(2G) catches making the car available for private use "whether or not for consideration". Charging the director for private mileage does not open the reclaim.
• Apportioning the purchase VAT. There is no 70/30 reclaim on a car purchase. The block is absolute; only the lease charge has a 50% figure, and that is fixed rather than calculated.
• Missing the repair VAT. Assuming that because the car was blocked, the servicing is blocked too. It is not.
• Taking a single line lease invoice. Failing to have maintenance supplied and identified separately means 50% of that element is blocked as well.
• Expecting a reclaim on a margin scheme car. There is no VAT shown on the invoice, so there is nothing to reclaim, and the seller must not show VAT separately.
• Using the payload test in the wrong system. One tonne payload is a VAT classification line. Employment tax classification of the same vehicle follows different rules.
• Confusing the taxes. A benefit in kind charge does not create recoverable VAT, and a blocked reclaim does not remove a benefit in kind charge. Our guides to P11D company car fuel paid by the director and limited company car tax relief cover those charges: the first answers what the director pays on the benefit, the second answers what the company can deduct.

Where this page stops, and its siblings start

This page owns the reclaim question and the input tax block in all their forms. Its sibling page on VAT on second hand cars deliberately does not cover reclaim: it owns the second hand margin scheme, the stock book discipline and the new against used purchase decision. The one point that crosses over is short. A margin scheme purchase carries no VAT on the invoice, so there is no input tax to reclaim no matter what the car is used for, and the seller must not show VAT separately on a margin scheme sales invoice. Everything else about the margin scheme is on that page.

The two other siblings hold their own ground. VAT on leased cars owns the 50% block in full, including the treatment of optional services, excess mileage and early termination. VAT on electric cars owns charging, including the difference between charging at work, at public premises and at home, and why an employer cannot recover VAT on an employee charging at home.

Separately, and for completeness rather than as advice on it: litigation and a regulatory redress process concerning historic motor finance commission arrangements are ongoing, and the current position is set out by the FCA on its car finance complaints page. We do not advise on, assess or refer motor finance redress claims, and none of that process changes the VAT treatment set out above.

The short version

Buy a car and the VAT is gone unless the car is trade stock, a taxi, a self-drive hire car, a driving school car, or genuinely unavailable for private use. Availability is the test, not use, and the overnight driveway is what usually fails it. Lease instead and half the VAT on the lease charge comes back, with separately invoiced maintenance recovered in full. Repairs are recoverable in full whatever the private motoring. Fuel is a three way choice, and the scale charge is all or nothing across the fleet. Buy a one tonne payload van and none of this applies at all, because it is not a car.