Complete Guide to Car Lease VAT

Yes, reclaiming some or all of the VAT back on your monthly car lease payments is possible. However, your business must be VAT-registered for eligibility.

If you want to reclaim VAT on these payments, HMRC automatically allows 50% to be claimed back, as this takes into account the private use of the vehicle. But, if you can prove the car is used for business purposes and has no personal usage, such as a pool car that is left at a business premise overnight – you may be able to reclaim 100% VAT back.

In addition, if your car lease includes a maintenance package, this is considered a business expense, so you reclaim 100% of the VAT back on this element.

Learn more about tax benefits in our guide to car lease tax benefits.

HMRC has a 50/50 rule for leasing business vehicles, as they automatically apply 50% usage of a business lease to private use.

This is a commonly used rule and means if you are a VAT-registered business and lease a car, you can usually reclaim 50% of the VAT on monthly payments.

There are exclusions to this rule where 100% VAT may be reclaimed, for example, pool cars, driving school cars, self-drive hire vehicles and taxis. But in these instances, it's up to you to prove it's solely used for business purposes – it is not automatically applied.

Another benefit of business car leasing is your company can claim 100% VAT back on maintenance charges. This aspect is classed as a business expense and, as long as the company paid for the work to be carried out, it is eligible for reclaiming the VAT element.

It's important to note the maintenance charge should be deemed an optional extra to be able to reclaim VAT. If it forms part of a compulsory aspect of the lease agreement, it falls into the 50/50 rule.

In addition, mileage charges form part of your monthly payments. The agreed allowance makes up part of your instalments, so this element is eligible for 50% VAT back. Excess mileage charges also follow this rule. However, there is an exception if excess mileage charges are incurred during a separate supply of maintenance.

Company car tax

Another aspect of business car leasing is company car tax or Benefit in Kind (BiK) tax. This applies to anyone using a business vehicle for personal use. The private use element is deemed as a benefit, and tax must be paid on this amount.

It is paid via personal tax and calculated on the price of the vehicles, earnings and CO2 emissions. This amount is recorded in an employee P11D and paid straight from earnings.

For more information on BiK and rates - check out our guide to company car tax.

In most cases, companies choose to lease business vehicles as they provide a variety of tax benefits and can make company travel cheaper overall.

If you buy a company car, this is reflected in the balance sheet as an asset, and there are depreciation aspects to calculate. In comparison, a lease car is not classed as a significant liability and doesn’t affect the balance sheet, which means your cash flow and credit lines are less affected.

Other benefits of leasing a company car over buying include:

• Motoring costs all in one place
• No need to worry about depreciation
• Access to the latest cars and technology including safety systems
• Transition to electric vehicles without a significant investment
• Reclaim costs through corporation tax
• Offer staff perks
• Save money compared to personal leasing

For more business leasing benefits, check out our guide.

If you are VAT-registered, you will submit monthly or quarterly VAT returns to calculate the tax owed. So, within this standard reporting process, you will need to include the amount you are reclaiming for lease instalments and any maintenance payments.

However, your leasing agreement may be slightly confusing as there is typically an annual statement supplied showing the instalments 12 months in advance. This statement generally includes the VAT for this amount. In comparison, you may also receive monthly receipts of your payments, but these may not include VAT.

In this case, use the annual statement for VAT purposes to ensure you can reclaim the amount and show it has been paid.

When reclaiming the maintenance VAT costs back, you must also have a separate invoice with the VAT and amount stated.

Tax rules and benefits

The rules surrounding VAT and tax benefits can be confusing. So to understand the best options for your company, it's helpful to speak with a tax specialist to take full advantage of any ways to save on leasing costs.