Confused by Value Added Tax or VAT on cars? Let’s break it down!
In simple terms, VAT is a type of tax that adds to the cost of most goods and services, including cars.
In the UK, this amounts to 20% of the purchase price paid to the government.
Now, here’s the thing – it may seem like an unavoidable expense, but there are situations where you might not have to pay VAT or pay a reduced amount.
For example, if you’re a business user registered for VAT, you could potentially reclaim some or all of the tax on your car purchase. And get this, drivers with disabilities who need a specially adapted vehicle may also be exempt from paying VAT, but there are certain conditions, of course.
But let me tell you, understanding all the ins and outs of VAT on cars can be quite challenging.
I mean, factors like how you pay (cash or finance) or even where you park your car at night can influence the amount of VAT you need to pay.
It’s a complex area, no doubt. That’s why in this guide, we’ll dig deeper into VAT on cars, providing answers and insights to help you navigate through all the confusion.
So, keep reading, and everything should become much clearer.
Who Has to Pay VAT in UK?
In the United Kingdom, the Value Added Tax (VAT) is a standard 20% charge that applies to most new car purchases, regardless of whether the car is bought outright, financed, or leased. However, this isn’t a one-size-fits-all rule, there are indeed exceptions.
If you’re a VAT-registered business or individual, you might be able to reclaim this tax.
For instance, taxi drivers can usually reclaim the full VAT on a car if it’s primarily used for their work. But for the rest of us, we need to prove that the car will be solely used for business purposes, and leasing is not an exception.
Remember, no private use is allowed, and the car should not even be accessible for private use – like being parked at an employee’s house overnight. This makes it quite tricky to claim back the full VAT on a car purchase.
On the other hand, pick-up trucks that fall under the category of light commercial vehicles (the same group as vans) have a different story. If the weight of the cargo they can carry exceeds 1,000kg, VAT-registered buyers can reclaim a portion of the tax.
Furthermore, if you’re a wheelchair user and need an adapted vehicle for personal use, you can buy one without paying VAT. However, there are certain limitations, and a form needs to be filled out before the purchase.
So, as you see, VAT in the UK isn’t always clear-cut when it comes to vehicles!
Do You Pay VAT When Selling?
If you’re selling a car that you previously claimed VAT on – think driving school cars or pool cars – then you’ll need to account for VAT on the total selling price. However, if you bought a car and were charged VAT but couldn’t reclaim it, there’s no need to charge VAT when you sell it.
This sort of sale is exempt from VAT, so any VAT you’ve paid on costs associated with selling the car (like auction fees) can’t be reclaimed.
Now, what about a car you bought without being charged VAT?
Perhaps it was second-hand from a private individual or a dealer selling under the VAT second-hand margin scheme.
In this case, if you sell the car under the same scheme, you don’t need to account for VAT on the full selling price.
Instead, you only account for VAT on the margin – the difference between your purchase price and selling price. And remember, you won’t show any VAT on your sales invoice.
Still, trying to understand? No worries!
The GOV UK website has a handy tool where you can answer a few questions specific to your situation to find out whether you have to pay VAT or not.
For a more detailed understanding, check out the Complete Guide for Car Selling “Sell My Car DVLA”
VAT on New Cars
Value Added Tax (VAT) is really important to think about when buying a car. It has a big impact on the final price, you know?
This tax is calculated on the pre-tax cost of the car, so it’s not just about the sticker price.
Here’s what you need to remember:
- VAT covers more than just the basic cost of the car. It also includes other expenses like getting the car from the factory to the dealership, a thorough inspection, and putting on number plates. And if you’ve added any extras, those are included too!
- Even though VAT is listed separately on your invoice, to be transparent, it’s still paid at the same time as the rest of the car’s cost.
- So when you’re budgeting for a new car, don’t forget to include that extra 20% for VAT. You don’t want any surprise costs when it’s time to pay!
Buying a car is a big deal, and understanding how VAT works will help you manage the financial side of things. With this knowledge, you can make smart choices and avoid any unexpected expenses!
VAT on Used/Second-Hand Cars
While you might think VAT is a concern only for new cars, it’s important to know that it can also apply to used or second-hand cars.
If you’re buying or selling privately, you’re in the clear – no VAT applies.
But things change when a dealer steps into the picture!
The most common way VAT comes into play is through the VAT second-hand margin scheme.
Here, the dealer only pays VAT on the profit they make – that’s the difference between what they paid for the car and what they sell it for.
The VAT rate is calculated as a sixth of this profit margin. It’s included in the car’s price tag, but you won’t see it itemised on your invoice like you would if you were buying a brand-new car.
Alternatively, some dealers may opt to charge 20% VAT on the selling price of the used car.
This isn’t a common approach because the tax charge ends up being higher than it would be under the second-hand margin scheme.
So, when you’re in the market for a used car, be sure to ask how VAT is applied so you know exactly what you’re paying for.
We hope this guide has been helpful in understanding VAT on cars.
So now, let’s summarise.
Understanding VAT can be challenging, but with the right information, you can navigate it confidently.
Remember, VAT differs for new and used cars, affecting calculations and payments. Depending on your circumstances, you can reclaim some of the tax.
Exemptions apply to wheelchair users and light commercial vehicles. Research and ask questions before making big purchases to make informed decisions.
You can try our VAT Calculator for precise insights into potential expenses!