VAT input tax recovery on motor vehicles is restricted to reflect the HMRC policy that private use of a business asset constitutes a supply of services and should not be subsidised through input tax recovery. The standard restriction of 50 percent of input VAT applies to mixed-use vehicles, with full recovery available only for qualifying business-only use. ## VAT on Cars Rates and Regulations Standard rate VAT of 20 percent applies to all new car purchases from dealers. This VAT is included in the purchase price and cannot generally be reclaimed in full on cars with any private use. Businesses purchasing cars for qualifying 100 percent business use can reclaim the full 20 percent input tax. ### When Full VAT Recovery Is Permitted Certain vehicle categories and uses qualify for 100 percent input tax recovery, making them significantly more attractive from a VAT planning perspective. Driving school vehicles with dual controls, emergency service vehicles, and cars used purely ashack for resale are among the categories that can qualify for full VAT recovery. Vehicle hire businesses purchasing cars for their hire fleet can recover input tax in full, as these vehicles constitute trading stock rather than business assets subject to the private use restriction. This is one reason why some business owners choose to lease vehicles through a hire company structure rather than purchasing directly. ### The 50 Percent Restriction for Mixed-Use Vehicles When a vehicle is used for any private purpose, whether by the business owner or an employee, HMRC restricts input tax recovery to 50 percent of the total VAT incurred. This restriction applies regardless of the proportion of business to private use. A vehicle driven 90 percent for business and 10 percent privately still qualifies only for the 50 percent restriction. Businesses can claim the full 50 percent restricted amount as input tax and recover the balance as a disallowed expense through their Corporation Tax computation. This approach means that while full VAT recovery is not possible, the effective after-tax cost of the VAT is only 50 percent of the original amount for profitable businesses subject to Corporation Tax. ### VAT on Leasing Versus Purchasing Business car leasing offers different VAT treatment that may be more advantageous for some businesses. Monthly lease payments include VAT that can generally be reclaimed in full if the vehicle is used for VATable business supplies and the lessor's VAT recovery is not restricted. This makes leasing particularly attractive for businesses with high VATiable turnover. ## Frequently Asked Questions **Can a sole trader reclaim VAT on a car purchase?** A sole trader can generally reclaim 50 percent of input VAT on a car purchase, regardless of the actual proportion of business to private use. This 50 percent restriction cannot be reduced even for vehicles with minimal private use. **How does VAT apply to car dealer trade purchases?** When a business buys from a car dealer, VAT is charged at 20 percent on the full purchase price. When buying from a private individual, no VAT applies, but the business cannot recover input tax on the purchase price. **Are electric vehicles treated differently for VAT?** No. The VAT rules on input tax recovery apply equally to electric vehicles. However, the 50 percent restriction means that a business buying an electric car still recovers only 50 percent of the VAT regardless of its zero-emission status. **Can businesses reclaim VAT on fuel for company cars?** VAT on fuel for business-only company cars can be reclaimed in full, subject to the appropriate records being maintained. For mixed-use vehicles, the VAT fuel scale charge applies and replaces any actual VAT reclaim for private fuel provided by the employer.

Disclaimer: CarTax.online provides general information for guidance purposes only. Tax rules and rates are subject to change. Always verify current rates with gov.uk or HMRC before making financial decisions. This guide was last reviewed in 2026.