Can a business reclaim VAT on a car

Usually not. Article 7 of the VAT (Input Tax) Order 1992 blocks the VAT on buying a car unless the car is used exclusively for business and not available for anyone’s private use, or is bought mainly for taxi work, self drive hire or driving instruction, or as stock by a dealer or manufacturer. A business that leases a car for normal business use can generally reclaim 50% of the VAT on the rentals.

What counts as a car for VAT?

VAT Notice 700/64 section 2, based on article 2 of the 1992 Order, defines a car as a motor vehicle normally used on public roads, with three or more wheels, that is either built or adapted mainly for carrying passengers or has roofed accommodation behind the driver’s seat with side windows, or built to take them. These are not cars:

• vehicles that seat only one person, or 12 or more including the driver
• caravans, ambulances and prison vans
• vehicles of 3 tonnes or more unladen weight
• special purpose vehicles such as ice cream vans, mobile shops, hearses and recovery vehicles
• vehicles with a payload of one tonne or more

Vans and other commercial vehicles follow the normal input tax rules. VIT55100 warns that HMRC looks closely at vehicles marketed as dual purpose, such as double cab pickups and motor caravans, and treats private use above roughly 5% a year as more than incidental. Fitting side windows or rear seats to a van converts it into a car, and if VAT was reclaimed on the van, output tax is due on its value at conversion.

Why is VAT on a car normally blocked?

Article 7(1) of the Input Tax Order excludes VAT on the supply, hire or import of a motor car from credit as input tax. HMRC’s VAT Input Tax Manual at VIT52100 explains that the block is a proxy for taxing private use: without it, businesses would have to account for output tax on every private journey. Article 7(2) lifts the block for a qualifying car used for a relevant purpose. A qualifying car is one on which no current or previous owner suffered the full block, which is why used cars from driving schools, rental and leasing fleets are often qualifying.

What does exclusive business use mean in practice?

VIT52700 says a car is used exclusively for business only if it is used solely for business journeys and is not available for any private use, and the business must have had no intention of making it available privately when it bought the car. The test is availability, not actual use. Journeys between home and the normal workplace are private (VIT55700).

The case law summarised at VIT64690 shows where the line falls:

• Upton t/a Fagomatic. A sole trader who bought a car and insured it for private use was treated as having made it available privately, even if he never meant to use it that way.
• Elm Milk Ltd. A company recovered VAT on a car for its managing director. It had recorded a resolution that the car was for business use only, the director had another car for private journeys, and the court accepted that suitable contractual restraints, including a binding contract with a sole director, can make a car unavailable for private use.
• Masterguard Security Services and Peter Jackson Jewellers. Recovery was allowed where private use was banned and the evidence backed it up: security guards who all had their own cars for private use, and a car used to move stock between a jeweller’s four shops.

When reviewing a claim, HMRC asks where the car is kept outside working hours, whether the user has another car funded outside the business, and whether the mileage fits business only use. A genuine pool car qualifies if it is normally kept at the principal place of business, is not allocated to an individual and is not kept at an employee’s home. See also pool cars for the separate income tax test.

Which businesses can reclaim regardless of private use?

Notice 700/64 paragraph 3.1 and VIT52100 list the other routes. A business can reclaim VAT in full on a qualifying car it intends to use primarily for:

• hire with a driver for carrying passengers, which covers taxis and private hire (see taxi and private hire drivers)
• self drive hire
• driving instruction

Here the test is primary use, so some private use does not block recovery. Motor manufacturers and dealers can also reclaim VAT on stock in trade cars they intend to sell within 12 months. Leasing companies can reclaim VAT on cars bought to lease, provided they lease at a commercial rate; for in house leasing companies, VIT52700 points to the arm’s length test in article 7(2G)(a). Where one of these cars is used privately, VIT55100 says the business must account for output tax on the actual private use.

Can a business reclaim VAT on a leased car?

Yes, partly. A business leasing a qualifying car normally cannot recover 50% of the VAT on the rentals, a block that stands in for private use; the other 50% is recoverable under the normal rules. The 50% block covers optional services bundled into the lease and excess mileage charges that form part of the leasing supply, but not maintenance supplied and invoiced separately. Since 1 April 2022, early termination charges are further payment for the lease, so the 50% block applies to them too. When a rental rebate is credited, only 50% of the VAT credit needs adjusting.

Taxi and driving school businesses can reclaim all the VAT on a leased qualifying car used primarily for those purposes. Short term hire of no more than 10 days for a specific business purpose escapes the 50% block, unless the hired car replaces an ordinary company car that is off the road.

What does this look like in practice?

Illustration only.

Situation	VAT charged	VAT reclaimable
Company buys a car the director also drives home	£6,000	Nil
Driving school buys the same car for lessons	£6,000	£6,000
Consultancy leases a car at £400 a month plus £80 VAT	£80 a month	£40 a month

If the driving school later sells its car for £10,000 plus VAT, it must charge VAT on the full price because it recovered the VAT, so £2,000 of output tax is due. The company whose VAT was blocked sells its car as an exempt supply with no VAT. Capital allowances follow separate rules; see capital allowances on cars.

What if the use changes or the car is sold?

If VAT was reclaimed under one of the exceptions and the car is later put to a use that would not qualify, for example a pool car allocated to one employee, a self supply arises and output tax is due on the car’s current value, taken as the price of an identical or similar car. Accessories fitted when a blocked car is bought share the block even if invoiced separately; accessories added later with a genuine business use are recoverable. VAT on repairs and maintenance is recoverable where the business pays and the car is used for business, even with some private use, but not for a sole proprietor’s or partner’s purely private car.

What mistakes come up most often?

• Relying on a business purpose alone. Buying a car for the business does not lift the block if it is available privately.
• Treating commuting as business. Home to work journeys are private.
• Selling a recovered car under the margin scheme. Notice 700/64 says it must be sold with VAT on the full price.
• Reclaiming 100% on a lease. Ordinary business leases carry the 50% block.
• Mixing up fuel and car rules. Fuel follows its own regime; see the VAT fuel scale charge and the overview of VAT on cars, vans and fuel.

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Related Accountapedia entries

• VAT on leasing a car and the 50% block
• VAT on vans and double cab pickups
• Do I charge VAT when selling business assets
• Reclaiming VAT on employee expenses
• VAT margin scheme for used car dealers
• Can executors reclaim overpaid inheritance tax
• Can I reclaim VAT on home office costs
• Can you reclaim VAT on costs of selling a company

Sources

• legislation.gov.uk: SI 1992/3222, article 7
• GOV.UK: Vat on motoring expenses notice 70064
• GOV.UK: Manual page VIT55100
• GOV.UK: Manual page VIT52100
• GOV.UK: Manual page VIT52700
• GOV.UK: Manual page VIT55700
• GOV.UK: Manual page VIT64690

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.