VAT on cars: how much is it?
Baffled by VAT on cars? Find out if you could reclaim tax on your car in our full guide to who pays VAT and how much it costs
VAT currently amounts to 20% of the price of anything you purchase, and that obviously includes cars. It's a form of tax that's paid to government, and means that an £18,000 Ford Fiesta includes £3,000 worth of VAT in the price. There's nothing you can really do about it, unless of course you're exempt from VAT.
If you're a business user - and registered for VAT - then you may be able to reclaim some, or all, of the tax on your purchase, which can add up to a pretty massive saving on such a big expense. Drivers with a disability who require an adapted vehicle may also be exempt from paying VAT under certain circumstances.
It's not entirely straightforward and it can depend on aspects such as whether you're paying for the car with cash or finance, or even where the car is parked at night. Our guide has been compiled with Steve Howard at The VAT People, a tax consultancy, to explain how VAT is charged on cars, when it’s paid and how you can reclaim it.
It's also worth noting that you may be required to pay less VAT on a used car purchase than you are if you're buying a brand new car. It's a complicated system, but it's yet another reason why used cars are generally much better value for money than new ones.
Who pays VAT?
VAT is charged at 20% on almost all new cars, whether they are bought upfront, on finance, or leased, Some people or businesses that are VAT registered can reclaim it, while some disabled drivers can avoid paying it in the first place.
Taxi drivers and driving instructors are usually able to claim back all of the VAT on a car if it is mostly used for business purposes, but most other owners must show the car will be used exclusively for business purposes - unless they are leasing it.
Not only is no private use allowed, but the vehicle must not even be available for private use - parked at an employee's home, for example. This limits the situation in which you can reclaim VAT on a car purchase, and is one of the reasons why claiming back the full VAT on a car purchase is difficult. See more detail below
The situation is different with pick-up trucks, which are classed as light commercial vehicles (the same category as vans) as long as the weight of cargo that they can carry - their payload - is more than 1,000kg. In this case, VAT-registered buyers can claim back a proportion of the tax.
Wheelchair users who require an adapted vehicle for personal use are able to buy one without paying VAT. There are some restrictions and a form that needs to be completed before purchase. More details are below.
VAT on new cars
VAT is charged at 20% of a car’s pre-tax cost, plus costs associated with putting the vehicle on the road. They are:
- Transporting it from the factory to the dealership
- Preparing it for sale (checking it over)
- Supplying and fitting numberplates
- Supplying and fitting options
It's separated out on your invoice, but payable at the same time as the rest of the car.
You need to be VAT registered and eligible under the strict rules to reclaim the VAT for a new car in your tax return. If you qualify for a refund in this case, then you'll have what is known as an 'excepted car'. These are the three main categories:
- A car that is used entirely for business purposes - such as a pool car - and is not even available for private use, which usually means that it should not be parked at a residential address overnight, or used to commute to and from work.
- A car that will mostly be used for driving lessons, as a taxi or as a hire car.
- A new car that has been registered to a dealer, with the intention of selling it on within the next 12 months. This is called a 'stock-in-trade car'.
The rules are different if you're buying a pick-up truck. You can see more details below.
VAT on discounted new cars
New car deals that offer savings on the list price also attract VAT. The tax will be lower because it's charged on the price after discount, plus the on-road and delivery costs mentioned above.
Reclaiming VAT on car leasing
If you lease a car for business purposes, and are VAT-registered, then you will normally be able to claim half of the VAT back.
This is a European Union policy, based on research that suggests personal use of company cars accounts for roughly 50% of their miles: the VAT refund is intended to cover the business use portion.
You'll only be able to reclaim all of the tax if you have an excepted car, detailed above.
Reclaiming VAT on lease agreements is easy to do in your return because the tax is added on to each monthly payment. That's why you'll see that leasing deals show the 'business contract hire' rate without VAT.
Reclaiming VAT on PCP finance
It's rare to reclaim VAT on PCP finance contracts because leasing is more tax efficient if you are eligible.
You do pay VAT on a new car when you take out PCP finance, but it’s not explicitly added on to your monthly payments, as it is with car leasing. Your finance company settles the VAT up front and your deposit and monthly payments are calculated to include this tax.
Mercedes Finance is currently trying to overturn the current rules, so that it pays the VAT charge monthly as the customer's instalments are paid, rather than in one lump sum.
Reclaiming VAT on pick-ups
A pick-up is classed as a light commercial vehicle rather than a car, as long as its payload (the weight of cargo that it can carry) is above 1,000kg. If that's the case, then VAT-registered companies should be able to reclaim the VAT for the proportion of business use.
So if 90% of its mileage is carried out on company business, then you should be able to reclaim 90% of the VAT in your return.
This tax treatment - along with the company car tax benefits that apply to double-cab pick-up trucks - has helped to boost the popularity of pick-up trucks as company vehicles, which are also used as family cars.
Wheelchair users who require a vehicle with 'permanent and substantial' modifications, such as steering wheel controls or a ramp, can avoid paying VAT on cars as long as the car is for their own personal or domestic use. This includes cars that are leased under the Motability scheme.
The car can be bought by either a disabled driver or - if they are unable to drive - someone close to them, such as a parent, child or carer. The key rule is that the vehicle must primarily be used for the benefit of a wheelchair user or someone who needs to be transported by stretcher.
After reports that the system was being abused, only one adapted car can be bought every three years by, or for the benefit of, a wheelchair user. There are exceptions for cars that are stolen or written off.
Full details of the terms and conditions for getting a VAT-free car as a disabled user are published on the government's website.
There's also a form that must be filled in before you buy an adapted vehicle because VAT cannot be reclaimed after you have bought one.
Cars that are bought and sold privately do not attract any VAT. However, if it is bought from a dealer VAT is applied to the price in one of two ways:
VAT second-hand margin scheme This is the most common way that VAT is applied because the tax is only charged on the profit that a car dealer makes: the difference between the price paid for the car and the price that it’s sold for. The VAT rate is calculated as a sixth of the profit margin. It’s passed on to the customer in the price of the car, but not itemised on the purchase invoice as it would be were they buying a new car.
VAT on the selling price Some dealers may charge VAT at 20% on the price of a used car. This is rarely used because the tax charge is higher than under the second-hand margin scheme.