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 such as tax, insurance, and administration fees, to name a few. For drivers financing a car, 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. But don’t worry, we’ve prepared this article to help you gain a better understanding of VAT on Hire Purchase transactions.
What is VAT?
VAT stands for Value Added Tax and it’s the kind of tax applied to the purchase price of products or services. In the UK, there are three 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 each and every sale because some are outside the scope of this type of tax or are exempt from it. Some examples include education, postage stamps, health care, and insurance, among others. Also, if you bought and/or used products outside of the UK or made donations to charitable organisations outside of the country, then those are also beyond the scope of UK VAT.
How Much is VAT on Car Purchases?
The VAT applied to your car purchase is 20% of the vehicle’s price. It means if the price of the car is £18,000, £3,000 goes to VAT. Since this tax is included in the price of the vehicle, there’s no getting around it unless you’re exempt from paying VAT.
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?
To be able to reclaim VAT on a brand new car, two conditions need to be met first. 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 Claim VAT on Pick-up Trucks?
Pick-up trucks are actually under the category of light commercial vehicles instead of a car. However, the weight of cargo that it carries should be above 1,000 kilograms. If you have a business and you’re VAT-registered, you may reclaim VAT on your pick-up for the part where you use the vehicle for your business.
Say, 90% of the pick-up truck’s mileage is for business purposes, then you may reclaim that same percentage in your tax return. This type of Hire Purchase VAT treatment on pick-up trucks is one of the reasons why the vehicle has become popular among many drivers. They can use it both for their business and as a family car.
VAT-free Car Purchases for Disabled Drivers
Some drivers may need wheelchairs and require their vehicles to be modified to accommodate their special needs. Disabled drivers can be exempt from paying VAT on their car purchases as long as the vehicle is only for domestic or personal use. Vehicles leased under the Motability scheme are also included here.
For the car purchase to be VAT-free, it should be bought by the drivers themselves or their parent, carer, or child where they will be a passenger in the car. What’s important here is that the car should be used for the benefit of the individual who requires adaptions. Do note that only one car can be bought every three years by a disabled driver. Of course, if the vehicle has been written off or stolen, then that’s an exemption.
Value-added Tax on Used Cars
If you buy a car that’s been sold by a private seller, it doesn’t attract any value-added tax. 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.
The first one is more common because VAT is charged on the profit that the used car dealer makes. The VAT rate is then calculated as one-sixth of the dealer’s profit margin. The figure is then passed onto the car buyer through the car’s price. It won’t be itemised on your invoice though, unlike with brand new car purchases.
For the second way of charging VAT, there are used car dealers that do charge 20% VAT on the price tag of a secondhand car. However, this is actually rare since the tax being charged will be higher compared to the secondhand margin scheme.
So, is the Hire Purchase VAT reclaimable? For business owners and disabled drivers requiring an adaption, yes, you may 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. There are other ways to save money on your car purchase though! Be sure to check out this article on how to prepare your budget when buying a car.