Can I claim back VAT on my HP finance?

Considering getting a new car on hire purchase, and wondering where you stand with the VAT? The UK tax system is not known for being straightforward, and it can be tricky to get to grips with how it works. That’s where we come in!

Let’s take a look at VAT and what it means for your hire purchase finance agreement.

What is VAT and how does it apply to car finance?

VAT - or Value Added Tax, to give it its full title - is a tax that’s added to goods and services in the UK. It tends to be included in the price you pay for things at the point when you buy them.

If you’re in the market for a new set of wheels, you should know that VAT is typically included in the price of both new cars and used cars. The standard rate of VAT is 20%, which means the price you pay for your car will include a 20% tax as part of the purchase price (as opposed to being charged separately later).

VAT applies to practically all new cars, regardless of whether you’re buying the vehicle outright, on finance, or leasing it.

Does VAT affect hire purchase finance?

When it comes to VAT, hire purchase (HP) finance is classed as a ‘purchase’, so VAT is charged in the same way as if you were buying the car outright. 

When you take out HP finance to buy a car, the finance company charges VAT upfront, and then they take it into account when they work your monthly repayments. You then pay the VAT as a portion of your repayments.

If you’re thinking about how to claim back the VAT on a HP finance deal, then you might be disappointed. Under the current rules, because HP is treated as a purchase, you can’t claim back the VAT. Sorry to be the bearer of bad news!

Are there exceptions to rules around VAT on car finance?

That said, if you’re a business, it’s a slightly different ball game. It depends on a few things, but you might be able to claim back some of the VAT on your car finance in some cases.

If your business is VAT registered you can usually reclaim the VAT on cars (and vans) that are used only for business. That means, you’re not driving these vehicles on family road trips or using them to do the weekly food shop. They’re exclusively for business use.

If you’re buying a car that’s specifically designed for business use - like a taxi, a hire car, or a car used for driving lessons - then you can usually reclaim the VAT. 

Bear in mind that these are general rules and many car finance providers won’t lend if a vehicle is being purchased for business use. It’s always best to check your specific finance agreement to see for certain if you can reclaim the VAT on your wheels, or whether in fact you are eligible for finance if you’re considering using your new set of wheels for business use.

Can I reclaim VAT any other way?

We’ve been focussing on hire purchase, but there is another way. If you lease a car for your business, you can usually claim 50% of the VAT back. The reason it’s only half is because HMRC assumes you’ll use the car for personal purposes (road trips across the South of France, weekly food shops to Aldi etc.) as well as for business purposes.

If you’re eyeing up a new ride for your business, make sure you check out all your options so you can do things in the most cost-effective, tax-efficient way for you.

Disclaimer: Carmoola does not provide financial or tax advice. You should always seek independent advice which takes into account your personal circumstances. For more information on VAT on vehicles and motoring expenses please visit the government website Carmoola also does not currently accept finance applications for cars that will be used for business use.