VAT on leasing a car and the 50% block

A VAT registered business that leases a qualifying car for business use normally cannot reclaim 50% of the VAT on the rental, because that half stands in for private use. Separately invoiced, genuinely optional maintenance escapes the block and is recoverable under the normal rules. Vans are not caught at all, because the block only applies to vehicles that are cars for VAT purposes.

Why can I only reclaim half the VAT on a car lease?

The rule comes from article 7 of the Value Added Tax (Input Tax) Order 1992 (SI 1992/3222). Article 7(1) excludes from credit the VAT charged on the supply of a motor car, including a letting on hire. Article 7(2H) then says that where the exclusion applies to a letting on hire, it applies to one half of the tax rather than all of it. So a business buying a car usually loses all the VAT, while a business leasing one loses half.

HMRC explains in VAT Notice 700/64, section 4.2, that the 50% block is there to cover the private use of the car, and that the remaining 50% can be reclaimed subject to the normal rules. That second point is easy to overlook: the recoverable half is still subject to the business purpose test and any partial exemption restriction, so a partly exempt business may recover less than 50% in total (HMRC manual VIT53300).

The block applies to a qualifying car, which broadly means a car on which the leasing company, or a previous owner, recovered the input tax in full. Leasing companies must state on their VAT invoices whether each car is a qualifying car, a requirement in regulation 14(6) of the VAT Regulations 1995 since 1 January 1996, according to VIT53300.

When does a leased car escape the 50% block?

There are two main routes to full recovery.

• Exclusive business use. Under article 7(2E) the block does not apply where the business intends to use the car exclusively for its business. Article 7(2G) makes that very hard to meet: a business is not treated as intending exclusive business use if it intends to make the car available to anyone for private use, including the proprietor or a partner. Notice 700/64 section 3.6 adds that a car is available for private use when nothing prevents it being used privately. A car taken home overnight by an employee will almost always fail.
• Taxi and driving instruction. Notice 700/64 section 4.3 allows full recovery on a qualifying car leased primarily for hire with a driver for carrying passengers, or for providing driving instruction.

For the rules on buying rather than leasing, including pool cars, see can a business reclaim VAT on a car.

Which charges on the lease invoice are caught?

Notice 700/64 section 4.5 says the 50% block applies to all the VAT on charges paid for the rental of the car under the leasing agreement. That includes optional services unless they are supplied and identified separately on the tax invoice, and excess mileage charges where they form part of the leasing supply.

The agreement HMRC reached with the British Vehicle Rental and Leasing Association, reproduced in VAT Notice 700/57, sets out what sits inside the blocked basic rental: depreciation, funding cost, the Vehicle Excise Duty licence, the overheads, risk and profit attributable to the rental, and the depreciation and funding of accessories fitted before delivery. HMRC treats accessories fitted by the lessor, even at the customer’s option, as part of the supply of the car.

Early termination charges are also caught. Since 1 April 2022 HMRC treats a fee for ending the contract early as further payment for the lease, so Notice 700/64 section 4.8 says you cannot recover 50% of the VAT shown on the termination invoice.

When is the maintenance element fully recoverable?

A contract hire agreement that includes servicing, repairs and roadside assistance is not automatically one blocked supply. Under the BVRLA agreement in Notice 700/57, HMRC accepts that the 50% block applies only to the car element where the lessor meets conditions including these:

• the additional services are separately described in the contract hire agreement
• the contract makes clear that the services are genuinely optional, at the lessee’s choice
• the vehicle schedule specifies the additional services and their total cost
• the periodic tax invoice describes the services separately and quantifies them separately, with their own VAT

Where those conditions are met, the VAT on the maintenance element is fully recoverable subject to the normal rules. Excess mileage charges should then be split on the same basis as the rental, so only the finance part of the excess charge suffers the block. This is why the invoice layout from the leasing company is worth checking before the first return: a single undivided rental figure means the block applies to the whole amount.

Maintenance you buy in yourself is a separate supply. Notice 700/64 section 5.1 says VAT on repairs and maintenance is recoverable where the business pays and the vehicle is used for business, even if it is also used privately.

What about short term hire and replacement cars?

HMRC applies a concession agreed with the BVRLA. Notice 700/64 section 4.4 says that if you hire a car for no more than 10 days to use specifically for your business, the 50% block does not apply, but it applies from the first day where a car is hired simply to replace an ordinary company car that is off the road. VIT53900 adds that each hiring must be looked at separately, so a business cannot average its rental periods across a quarter, and that evening or weekend use during a qualifying short hire is ignored.

Relief cars supplied under a lease have their own rule. VIT53600 says that where a monthly charge is made as a genuinely optional extra covering a replacement car for not more than 28 days after breakdown or accident, the 50% restriction does not apply to that monthly charge.

How are leased vans different?

Article 7 only restricts VAT on a motor car. A van, a pickup with a payload of one tonne or more, or another vehicle outside the car definition in article 2 of the 1992 Order is not caught, so VAT on its lease rentals is recoverable under the ordinary rules. HMRC’s manual at VIT51500 says incidental private use of most commercial vehicles is treated as de minimis, but where private use is more than that the VAT must be apportioned. The vehicle definitions, car derived vans and double cab pickups are covered in VAT on vans and double cab pickups.

What does this look like on a monthly invoice?

Illustration only. A fully taxable consultancy leases a qualifying car for a director who also uses it privately. The monthly invoice shows a finance rental of £300 plus £60 VAT and a separately described optional maintenance charge of £50 plus £10 VAT, meeting the Notice 700/57 conditions.

Element	VAT charged	Recoverable
Finance rental	£60	£30 (50% blocked)
Maintenance	£10	£10
Total	£70	£40

If the leasing company had shown one combined rental of £350 plus £70 VAT, the business could only have recovered £35. When the lease ends and the lessor issues a VAT credit note for a rental rebate, Notice 700/64 section 4.10 says the business needs to adjust only 50% of the VAT credit, matching the 50% it originally recovered.

What mistakes come up most often?

• Claiming 100% on the basis of business need. Exclusive business use turns on whether the car is available for private use, not on how much it is actually used privately.
• Ignoring partial exemption on the other half. The recoverable 50% is input tax like any other; see partial exemption.
• Charging output tax on private use as well. Notice 700/64 section 6.2 confirms the private use charge does not apply where the 50% block has been applied, because the block is the proxy for private use.
• Confusing the car with its fuel. The 50% block does not deal with road fuel. Private fuel is handled separately, usually through the fuel scale charge.
• Applying the VAT rule to income tax. The 50% VAT block is unrelated to the income tax restriction on high emission car hire; see the 15% lease disallowance.

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Related Accountapedia entries

• Reclaiming VAT on employee expenses
• Do I charge VAT when selling business assets
• VAT margin scheme for used car dealers
• Can my company reclaim VAT on personal costs
• How VAT works: output tax and input tax

Sources

• legislation.gov.uk: SI 1992/3222, article 7
• GOV.UK: Vat on motoring expenses notice 70064
• GOV.UK: Manual page VIT53300
• GOV.UK: Vat administrative agreements with trade bodies notice 70057
• GOV.UK: Manual page VIT53900
• GOV.UK: Manual page VIT53600
• GOV.UK: Manual page VIT51500

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.