Motor expenses – the unexpected VAT bonus

It is well known that VAT rules for cars used for business purposes can be harsh, but for certain business, car-related expenditure can actually be quite generous.

We will look at these rules and how you can take advantage of them.

Inflexible rules

If you cannot prove that a car is used 100% for business purposes then, except in extreme circumstances, HMRC will not allow you to claim back any VAT paid when you purchased it. You cannot claim VAT if you use your car for any private purposes. However, this rule does not apply to motor running costs you incur and in fact, in this situation, VAT rules are the complete opposite to the rules relating to car purchasing.

Costs related to journeys

The rules for journey-related expenses differ to those for motor running costs. The usual VAT rules apply and VAT paid on business journey expenses, such as off-road parking, can be reclaimed in full.

For certain journey-related expenses however, you might need to share out VAT between private and business use. This is similar to claiming VAT on petrol.

Motor running costs

VAT rules become interesting when you consider costs such as maintaining or repairing your car.

It must be noted that HMRC allows you to reclaim 100% of the VAT paid on this type of expenditure, even if a significant portion of the company car’s use is for private purposes. This rule also applies to personally owned cars if they are used for business journeys.

Let’s look at the following example:

Fran’s cleaning business employs two members of staff. Fran and her staff all use their own cars to travel to and from clients as well as for private journeys. Fran pays the costs of servicing all of the cars and in the case of her two employees, she deducts the servicing costs from their mileage allowance (but net of the fuel part of the cost). Fran is entitled to claim the VAT back on all three cars’ service bills. Her business also pays the bills for any cleaning or repair costs for her car and for new tyres, meaning that the business can reclaim 100% of the VAT on this expenditure.

There are two things to note here:

  • The VAT break can be utilised by businesses where they pay service (etc.) bills for directors and employees and, in certain cases, for freelancers as well.
  • It is not essential for claiming back VAT, but you should if at all possible arrange for bills to be addressed to your company. It must be noted that for employees, including directors, NI charges and income tax will apply if the value of the bills or services is more than their millage allowance entitlements (this is again net of the fuel part of the cost).

No minimum business use requirement

To take advantage of this VAT break, you will be pleased to know that there is no minimum business use requirement, which means that even if you only use your car for business purposes for about 5% of the time, you will still be able to claim 100% of the VAT paid on service costs etc. by your business.

To conclude…

Your business can claim back 100% of the VAT with regards to car maintenance costs for your car and those of your employees. The usual allocation of costs between private and business use is not needed. If you are careful, you can use this VAT break side by side with car mileage allowances.

Visit (TX D 18.22.04) for more information.

We are happy to discuss VAT with you in more detail, contact ADM on 01242 679767 or email


Photo by Jannis Lucas on Unsplash

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The information contained in this website is for general information purposes only. The information is provided by ADM Accountancy Services Ltd and while we endeavour to keep the information up to date and correct...
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ADM Accountancy Services Ltd
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Registration Number: 06912489

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