Can You Claim Back VAT on a Hire Purchase Deal?
When you buy a car, you don’t only pay for the price of the vehicle but you also have to pay for other expenses. For drivers that use car finance, a common question is, “Can I claim VAT on Hire Purchase?” Reclaiming VAT on Hire Purchase agreements can get a bit confusing for those who are new to the process, so this article provides some potential options. This article is purely informative from the position of a car finance company and should not be taken as legal advice.
What is VAT?
VAT stands for Value Added Tax it’s the kind of tax applied to the purchase price of products or services. In the UK, there are three different VAT rates, depending on the product or service that is being provided.
- Standard 20% - Applies to most products and services ✅
- Reduced 5% - Applies to residential property conversions, children’s car seats, home energy, and certain products and services ✅
- Zero 0% - This applies mostly to food as well as children’s clothing ✅
VAT is not applicable to every sale because some are outside the scope of this type of tax or are exempt from it. Some exempt examples include:
- Postage stamps
- Health care
- Charity donations outside of the UK
How Much is VAT on Car Purchases? 🚗
The VAT applied to your car purchase is typically 20% of the vehicle’s price. Since this tax is included in the price of the vehicle, there’s no getting around it unless you’re exempt from paying VAT. Similarly, if you get a car on finance or get a car loan that 20% is still included in the cost of the vehicle.
For business owners, you may reclaim VAT on Hire Purchase car finance agreements. It can be part or all of the VAT on your car purchase, allowing you to save a significant amount of money on such a huge expense. Cars purchased by or for disabled drivers who need an adapted vehicle can be exempt from VAT in specific circumstances.
Can I Reclaim VAT on a New Car? 🚗
Most often you can't reclaim VAT on a new car, however, there are exceptions. To be able to reclaim VAT on a brand-new car, two conditions need to be met first. According to the UK government: One, you have to be VAT registered, and two, you have to be eligible to reclaim VAT on the new vehicle in your tax return. In case you are eligible for a refund, then the car you have is an “excepted car.” There are three major categories where this is applicable.
- Vehicles that are used only for business purposes and not for private or personal use. It means the car shouldn’t be parked at your residential address overnight. The car you use to get to and from work does not fall in this category.
- Vehicles that are used as hire cars, taxis, and for driving lessons.
- New cars that have been registered to dealers and are intended to be sold in the next 12 months. These vehicles are called stock-in-trade cars.
Can I reclaim VAT on Pick-up Trucks? 🚗
Yes, you can reclaim VAT on commercial vehicles, It's commonly known that VAT cannot be reclaimed on personal vehicles such as cars, but it's not the same for commercial vehicles ✅
Pick-up trucks fall under the light commercial vehicle category rather than being classified as cars. To be considered a commercial vehicle, the weight of cargo that the pick-up truck carries should be over 1,000 kilograms. If you are a business owner who is VAT-registered, you can reclaim the VAT on your pick-up truck for the portion that you use for business purposes.
- As long as you are a registered VAT business and use the vehicles for work purposes
- You're eligible to claim back VAT on commercial vehicles
For example, if 90% of the mileage on your pick-up truck is for business purposes, you can reclaim that same percentage on your tax return. The ability to treat pick-up trucks as commercial vehicles for VAT purposes is one of the reasons why they have become popular among many drivers. This type of vehicle can serve a dual purpose as both a business and family car.VAT-free Car Purchases for Disabled Drivers 🚗
Drivers who use wheelchairs may require vehicle modifications to meet their specific needs. If the vehicle is only intended for personal or domestic use, disabled drivers may be eligible for a VAT exemption when purchasing a car. This includes vehicles leased under the Motability scheme.
To qualify for the VAT exemption, the car must be purchased by the disabled driver themselves or by their parent, carer, or child, with the intent of using the car for the benefit of the individual requiring adaptations. It's important to note that disabled drivers are limited to purchasing one car every three years, with exceptions made in cases where the vehicle has been written off or stolen.
Do you get VAT on Used Cars? 🚗
If you buy a car that’s been sold by a private seller, VAT is not included in the price. However, if you bought the car from a used car dealer, then VAT will be applied either through the VAT secondhand margin scheme or VAT on the selling price.
What is the VAT secondhand margin scheme? 🚗
The VAT secondhand margin scheme is a special tax scheme in which VAT is only paid on the difference between the selling price of a used car and the price at which it was acquired by the seller. This scheme applies to businesses that sell used cars and is designed to avoid double taxation of the same item by only charging VAT on the profit margin.
So, is the Hire Purchase VAT reclaimable? For business owners and disabled drivers requiring an adaption, the short answer is yes, you could potentially reclaim VAT on your car purchase. However, for most drivers who buy vehicles for personal or domestic use, reclaiming VAT on Hire Purchase is not applicable.
It is important to note however that we are not giving legal advice and this is purely informational. To get legal advice chat with an expert 🌟