Can You Claim VAT on a Company Car? In Most Cases, the Answer is No

At BW Bookkeeping we have had this question about claiming VAT on a car come up twice this month so we felt it must be worth sharing some guidance on the subject.

It’s a fair question. After all, businesses can usually reclaim VAT on purchases made for business purposes. However, company cars are one area where the rules are much stricter.

In fact, for most businesses, VAT on the purchase of a company car cannot be reclaimed at all.

Let’s look at why that is and the limited situations where HMRC does allow VAT recovery.

Why Is VAT Recovery on Company Cars So Restricted?

HMRC takes the view that most company cars have some level of private use, even if they’re mainly used for work.

Because private use is difficult to monitor and prove otherwise, the default position is that VAT on the purchase of a company car is blocked.

That means if your business buys a car that will be available to an employee or director, you should generally assume that the VAT cannot be reclaimed unless you meet one of the specific exceptions.

The Main Exception: No Private Use Whatsoever

The most common exception is where the car is used exclusively for business purposes and is not available for any private use.

This is a very high bar to meet.

To satisfy HMRC, you would typically need to demonstrate that:

• Private use is prohibited by company policy.
• The vehicle is not taken home by employees.
• The car is kept at business premises when not in use.
• Detailed records support the business-only use.

Simply saying that a vehicle is “mainly for business” isn’t enough. Even occasional private journeys can prevent VAT recovery.

Cars Used by Driving Schools

Driving schools can usually reclaim VAT on vehicles used for driving instruction.

This is because the car is being used directly to provide the business’s taxable services rather than as a benefit for an employee or director.

Cars Held as Stock by Motor Dealers

If your business buys and sells vehicles, the rules are different.

Motor dealers can generally reclaim VAT on cars purchased as stock because the vehicles are intended for resale rather than business transport.

Cars Used for Self-Drive Hire

Businesses that hire vehicles to customers can usually reclaim VAT on cars purchased for that purpose.

In this situation, the vehicle is generating taxable income through the hire activity, so the VAT recovery restrictions do not apply in the same way.

What About Leasing a Company Car?

The rules for leased vehicles are often more favourable.

If a business leases a car and there is private use, it can usually reclaim 50% of the VAT charged on the lease payments.

Where the vehicle is used exclusively for business purposes with no private use, 100% of the VAT on lease payments may be recoverable.

The treatment of fuel and maintenance costs can differ, so it’s worth checking the details before making assumptions.

Commercial Vehicles Are Different

It’s important not to confuse company cars with commercial vehicles such as vans and some pickups.

In many cases, businesses can reclaim the VAT in full on vans and other qualifying commercial vehicles, provided they are used for business purposes and normal VAT rules are met.

This difference can have a significant impact when deciding which vehicle best suits the needs of the business.

Contact us and we can always help you with any worry’s you have about this subject.

The Key Takeaway

Many business owners are surprised to discover that VAT recovery on company cars is the exception rather than the rule.

Unless the vehicle falls into a specific category—such as a driving school car, a hire car, dealer stock, or a genuinely business-only vehicle—the VAT on the purchase price will usually be blocked.

Before buying a company car, it’s worth taking advice on the VAT position. In this and lots of scenarios it would be worth asking your bookkeeper or accountant BEFORE you go ahead with the purchase so that you understand the tax situation before the money is committed.

To see what HMRC have to say about VAT on a company car, we have provided a link to the government site.

I hope we managed to help you understand why claiming VAT on company cars can be done but only in exceptional circumstances.

Another blog you might be interested in Who Can Help Me With MY Vat?