How much is VAT on a car? Explaining it with numbers

If you're looking to buy a new or used car in the UK, you may want to know if VAT is charged on new and used vehicles in the UK. The answer to this question will depend on how the car is purchased. VAT, which is imposed at a standard rate of 20% on new vehicles, can significantly increase the cost of a car purchase

Want to learn more about VAT on a car? Discover if and how much VAT you can claim back on your VAT-qualifying car in our comprehensive guide.

How Much Is VAT on a Car?

In the UK, value-added tax (VAT) is currently set at 20% of the purchase price of just about everything, including cars. VAT is a tax payment to the government; therefore, an £18,000 Corolla includes £3,000 in VAT in the purchase price. Unless you're exempt from VAT, there isn't much you can do about it.

It can be a huge savings opportunity for those who utilise their purchases for business purposes and who are registered for VAT. Claiming back VAT can result in a significant reduction in the overall cost of a purchase. In some cases, drivers with disabilities who need adapted vehicles may also be excluded from paying VAT.

It's also important to keep in mind that you will often have to pay no VAT on a second-hand car. Another reason second-hand cars are a better investment than new ones is the intricate system that goes into valuing them.

Who pays VAT on a car?

Almost all new vehicles, whether purchased outright, leased, or financed, are subject to 20% VAT. VAT-registered individuals and businesses may reclaim the first tax, while disabled drivers may be able to avoid it altogether.

Owners of taxis and driving instructors are often allowed to claim back all the VAT on a new car if they can prove that the vehicle is primarily used for their business. Unless they lease the car, most owners must establish that the vehicle will be used entirely for business purposes.

Private use of the vehicle is not only prohibited, but the car must not even be available for personal use, which could involve it being parked at an employee's home. As a result, getting a full refund for the VAT charges you paid on a car is more difficult because of the limitations on when you can do so.

On the other hand, pickup trucks are classified as light commercial vehicles (the same category as vans) if they have a payload capacity of greater than 1,000 kg. VAT-registered buyers in this situation can recoup a percentage of the tax.

Those who need a wheelchair-adapted car for their daily personal use do not have to pay VAT on purchasing a vehicle. Some criteria and paperwork must be filled out before the purchase.

When can I claim back VAT on my car purchase?

You can claim back the VAT paid during the purchase of a car and any fitted accessories if you are registered for VAT and are generally eligible to reclaim the VAT cost. However, the vehicle must be used solely for work-related activities, i.e., it must be a legitimate pool vehicle for employees only.

You might also be able to recover all the VAT on new cars if they are primarily used

• as taxicabs
• for driving lessons
• for self-drive rentals

When is a car used exclusively for business purposes?

The absence of any personal use of a vehicle indicates that it is solely being utilised by a company for business purposes (except in commercial leasing or rental operations). This includes going to and from work (unless it's a temporary location). Evidence, such as the employee's employment contract, must be provided to prove it is a car for business-related commuting. Being able to pass this test is quite a challenge.

Do you pay VAT on a new car?

VAT is assessed at a rate of 20% of a car's pre-tax price, plus any expenditures related to placing the vehicle on the road. Some of the costs incurred are:

• Moving it from the factory to the dealership
• Getting it ready to sell (checking it over)
• Supplying and installing number plates
• Options for provision and installation

Although VAT will be listed separately on your invoice, it must be paid at the same time as the rest of the car.

Do you pay VAT on second-hand Cars?

VAT is not applied on privately purchased and sold cars. But if you buy a second-hand car from a dealer, VAT is added to the cost in one of two ways:

• VAT second-hand margin scheme - This is the most popular method of applying VAT on cars because the tax is only levied on the profit that an automobile dealer makes or the difference between the price paid for the vehicle and the price it is sold for. One-sixth of the profit margin is used to compute the VAT rate. Although it is included in the price of the car, it is not included on the purchase invoice as it would be if the buyer were buying a new vehicle.
• VAT on the selling price - Some sellers may add VAT on used cars at a rate of 20% to the final price. This is rarely because it works out more expensive for dealers than the second-hand margin scheme.

When can I claim back VAT on my car purchase?

The following is a breakdown of the various scenarios in which VAT can be claimed.

VAT on discounted new vehicles

Deals on new cars sold with a discount on the advertised price will also incur VAT. The tax will be reduced because it is imposed on the price after the discount, on-road and delivery expenses mentioned above.

VAT reclaim on leased cars

If you lease a vehicle for business use and are registered for VAT, you can generally reclaim half of the VAT.

The VAT refund is meant to cover the business use, which is based on research that estimates that personal use of business cars accounts for about 50% of their miles.

As tax is added to each monthly payment, reclaiming VAT on lease agreements is simple. Because of this, leasing transactions usually exhibit the "business contract hire" pricing without VAT.

VAT reclaim on PCP finance

Reclaiming VAT on PCP finance agreements is uncommon because, if you qualify, leasing is more tax advantageous.

When you take out PCP finance for a new car, you will pay VAT, but it is not specifically included in your monthly payments as you would when you lease a vehicle. Your finance provider ends up charging VAT up front, and this tax is factored into the calculation for your deposit and monthly payments.

Reclaiming VAT on Pick-Up Trucks

If a pickup truck can transport more than 1,000 kg of freight, it is considered a light commercial vehicle rather than a car. In this case, a VAT-registered business should be able to claim the VAT for the portion that was used for commercial purposes.

Therefore, when 90% of the mileage would be driven for business purposes, you would be entitled to claim 90% of the VAT in your tax return. Pickup trucks have become more popular as business vehicles that can be used as family vehicles because of this tax status and the corporate car tax benefits that apply to double-cab vehicles.

Purchasing a VAT-free vehicle as a disabled driver

As long as the car is for their own personal or domestic use, wheelchair users who require a vehicle with "permanent and substantial" modifications, such as steering wheel controls or a ramp, are exempt from paying VAT on cars. This also applies to vehicles leased under the Motability scheme.

If the disabled driver is unable to drive, a family member, such as a parent, child, or carer, may purchase the vehicle on their behalf. The vehicle's primary usage must be for the benefit of a person in a wheelchair or someone who must be carried on a stretcher.

Only one modified car can be purchased by or for the benefit of a wheelchair user every three years due to complaints that the system was being exploited. In some cases, if cars are stolen or written off, owners can be exempt from this rule.

The government's website publishes all the terms and conditions for receiving a VAT-free car as a disabled user. Since VAT cannot be reclaimed after you have purchased an adapted vehicle, a formmust also be completed before you make the purchase.

VAT reclaim on pre-registered or nearly new vehicles

When a vehicle is pre-registered, a dealership effectively purchases it and then reclaims the VAT under the "stock-in-trade" criterion, which anticipates the car will be sold within a year.

When a private customer purchases the vehicle, VAT is charged.

Can VAT be claimed back for any other expenses?

If the vehicle is used solely for business, you can claim back VAT on fuel. The VAT cannot be recovered if the car is utilised for commercial and personal purposes. There are several methods for reclaiming the VAT on fuel (seek specialist advice on the best way for your business to claim it back).

You are allowed to claim other expenses, such as repairs, maintenance, and off-street parking; however, the expense for any of these components must be borne by the business and must also have a business use.

How to check if VAT has been paid on a vehicle

When a VAT-registered individual or company sells you products and charges VAT, they are required to give you an invoice during the sale that details the VAT you have been charged (either added on or included). Their VAT registration number must also appear on the invoice. Examine a few of the receipts you have for other purchases.

Retail businesses that sell to customers are required to display the price you will pay; therefore, if they are VAT registered, the price must include VAT, which is why you may not always be aware that you are paying VAT. A company that is registered for VAT and sells primarily to businesses is permitted to display prices that exclude VAT, but they must also state that VAT will be added. The price they offer you will be the amount you pay because a company car that is not registered for VAT will not have been eligible for the VAT claim when they purchased it.

It is reasonable for a VAT-registered company selling you a van to display VAT-exclusive pricing, provided they let you know that the VAT will be charged. After all, it is a van, which is a commercial vehicle.

Summing Up

To summarise, VAT will be levied if a person purchases a new car for a private purpose.

If you buy a second-hand car from a commercial dealer, VAT must still be paid, depending on how the dealer calculated it. Most car dealers charge VAT on profit (the second-hand margin scheme). Others charge it on transaction costs. It depends on how they store their records.

Car dealers must inform HMRC of whatever method they use to calculate VAT, but they're not required to tell customers. A customer has no legal right to know, or be said, how much of the price comprises VAT.

If you have any questions regarding VAT on a car, contact Carplus today! With the guidance of our experts, you'll be able to make the best decision possible.