Businesses that lease cars often assume they can recover all of the VAT charged on car  leasing payments. In practice, the rules are more limited.

Where a business leases a qualifying car, HMRC normally only allows 50% of the VAT on the leasing charges to be reclaimed. The restriction is designed to reflect an element of private use, even where the vehicle is mainly used for business journeys.

The rules are different in certain cases. For example, full VAT recovery is generally available where the vehicle is used as a taxi or for driving instruction, as these are treated as wholly business activities. This would allow qualifying businesses to recover 100% of the VAT charged on the lease.

The 50% restriction can also apply to short-term vehicle hire, including temporary replacement cars. However, where a car is hired for no more than 10 days and is used entirely for business purposes, the VAT block does not usually apply.

These rules can easily be overlooked, particularly where businesses hire vehicles on an ad hoc basis or assume that some business use automatically means full VAT recovery. It is important to ensure that the correct amount of VAT is reclaimed on car leasing costs to avoid issues arising after the fact.

Changes announced in the Autumn Budget have removed the use of a niche VAT scheme known as the Tour Operators Margin Scheme (TOMS) for private hire vehicle operators from January 2026.

TOMS was originally designed for tour operators selling travel packages. However, some large ride-hailing firms had used it to reduce their VAT liability by charging VAT only on their commission, rather than on the full fare. Following ongoing legal uncertainty, the government legislated to exclude taxi and private hire journeys from the scheme.

The change was expected to level the playing field, particularly benefiting black cab drivers in London and smaller taxi firms from outside London where passengers contract directly with the driver.

In practice, the outcome has been more complex. Due to Transport for London licensing rules, most fares in London are now subject to VAT. Outside London, some ride-hailing platforms, including Uber, have restructured arrangements so they act as agents rather than suppliers. This change moves the VAT liability to the drivers. As most drivers earn below the VAT registration threshold of £90,000 this means that on rides outside of London VAT is often still not charged.

For businesses, these changes have important implications when reclaiming VAT. Input VAT can only be reclaimed where it is clearly shown on a valid VAT invoice or receipt. If VAT is not separately identified, no reclaim is permitted, although the expense may still be deductible for Corporation Tax purposes.

The VAT treatment of car leasing is an important consideration for businesses that incurs VAT on these costs. 

In general, leasing companies are able to recover the VAT incurred on the purchase of cars, provided the vehicles are leased out at a commercial rate. 

For businesses leasing a car, however, the position is more restrictive. Where a business leases a ‘qualifying car’ for business use, only 50% of the VAT on the lease payments is typically recoverable. This restriction reflects an assumed element of private use, even if the car is mainly used for business purposes.

There are some exceptions to this rule. Where a car is used primarily for taxi services (hire with a driver) or for driving instruction, businesses can usually recover 100% of the VAT charged on the lease.

It is also worth noting that the 50% block applies not only to long-term leasing but also to short-term self-drive hire, such as daily rentals used to temporarily replace a company car. The 50% restriction does not apply where a car is hired for a period of no more than 10 days, provided it is used exclusively for business purposes.

Understanding these rules ensures is important to ensure the correct amount of VAT is recovered on car leasing costs. 

Reclaiming VAT on a self-build home project can significantly reduce the overall cost of building or converting your property. The VAT DIY Housebuilders Scheme is a special VAT scheme that allows private individuals to benefit from the same VAT advantages as professional property developers. Under this scheme, the qualifying construction costs of a new home and certain types of conversion work can effectively benefit from VAT zero-rating. This allows qualifying homeowners to reclaim the VAT paid on eligible building materials.

A claim can be made for qualifying building materials on which VAT has been charged. Qualifying materials include most materials incorporated into a new building or conversion which cannot easily be removed. This includes items such as bricks, timber, roofing materials, plumbing, wiring and plaster. Items such as fitted furniture, carpets, curtains, and certain domestic appliances are excluded from the scheme, even if they are installed as part of the build.

In most cases, you must submit a claim within six months of completing the new build or conversion project. Completion is usually evidenced by a completion certificate or similar official documentation.

Claims are normally submitted online. However, if you are unable to use the digital service, you can apply using paper forms. There are two main forms available: VAT 431NB for new build properties, and VAT 431C for qualifying conversions.

When issuing invoices, it is important to apply the correct VAT treatment. In some cases, that means not charging VAT at all. Although most UK businesses charge VAT at the standard rate of 20%, there are other rates and categories that may apply. Understanding these distinctions can help you avoid costly errors and penalties.

In addition to the 20% standard rate, there is also reduced VAT rate (5%) and a zero VAT rate (0%). Even though zero-rated supplies are charged at 0%, they are still within the VAT system and must be recorded correctly on your VAT return.

There are two main categories where VAT is not charged: exempt supplies and supplies that fall outside the scope of VAT. Although no VAT is charged in either case, the rules and reporting requirements are different.

Exempt supplies are goods or services on which no VAT is charged. Common examples include insurance, postage stamps and health services provided by doctors. If your business only makes exempt supplies, you cannot register for VAT and you are not able to reclaim VAT on your business costs.

Supplies that are outside the scope of VAT fall completely outside the UK VAT system. In these cases, VAT cannot be charged and VAT on related costs cannot usually be reclaimed. Examples of supplies outside the scope include goods or services bought and used outside the UK, statutory fees such as the London Congestion Charge and goods sold as part of a private hobby.

If VAT has been charged incorrectly, the error must be corrected. The process for doing so depends on the amount involved and when the mistake occurred. Acting promptly can minimise disruption and potential penalties.

If you are unsure whether VAT should be charged on a particular supply, we would be happy to help guide you on this issue.

For eligible businesses, the VAT Annual Accounting Scheme can reduce paperwork, smooth cash flow and replace quarterly returns with a single annual submission.

The VAT Annual Accounting Scheme is open to most businesses with a taxable turnover of up to £1.35 million per year. Businesses using the scheme are required to submit one VAT return per year, rather than quarterly returns. This can significantly reduce the administrative time and cost associated with preparing and filing your VAT returns.

The scheme also allows businesses to make regular interim payments throughout the year, which can help with cash flow management. Interim VAT payments are made during the year based on the business’s estimated total VAT liability for the accounting period.

Interim payments can be made either monthly or quarterly and are followed by a final balancing payment submitted with the annual VAT return. The regular payments are usually based on the previous year’s VAT liability, which means they may be higher than necessary if turnover has fallen.

Where payments are made monthly, they are typically calculated as 10% of the estimated annual VAT bill and are due at the end of months 4 through 12 of the VAT accounting period. Where payments are made quarterly, they are usually calculated as 25% of the estimated VAT liability and are due at the end of months 4, 7 and 10.

The final balancing payment for the annual VAT return is due within two months of the end of the standard 12-month VAT accounting period. If VAT has been overpaid based on the estimated amounts, HMRC will refund the difference. Payments must be made electronically.

VAT road fuel scale charges are fixed, standardised amounts that businesses must use to account for output VAT when they provide fuel for private use in a vehicle that is also used for business purposes.

The VAT road fuel scale charges are published annually with the current figures applying from 1 May 2025 to 30 April 2026. The fuel scale rates are designed to encourage the use of cars with low CO2 emissions.

A business can use the VAT fuel scale charges to work how much VAT they need to pay back when a business car is used for private journeys. This approach removes the need to keep detailed mileage records. In practice, businesses should reclaim all the VAT on the fuel for the car, then use the fuel scale charge tool to work out the correct charge for the period. Once calculated, this amount needs to be included in the VAT owed on the VAT Return.

Where the CO2 emission figure is not a multiple of five, the figure is rounded down to the next multiple of five to determine the level of the charge. For a bi-fuel vehicle which has two CO2 emissions figures, the lower of the two figures should be used. There are special rules for cars which are too old to have a CO2 emissions figure.

If your business has relatively low VATable expenses, the VAT Flat Rate Scheme can simplify your VAT reporting and may also improve cash flow.

The VAT Flat Rate Scheme is designed to simplify VAT accounting for small businesses. Instead of calculating VAT on each sale and purchase, businesses pay a fixed percentage of their total turnover, including VAT. This percentage varies depending on the type of business activity and is set by HMRC.

The scheme reduces the complexity of VAT compliance by eliminating the need for detailed calculations and record-keeping of input VAT on purchases.

To be eligible for the scheme, a business must expect its annual taxable turnover (excluding VAT) to be no more than £150,000 in the next 12 months.

The advantages of the VAT Flat Rate Scheme include:

• Simplified VAT Administration. Businesses don't need to calculate VAT on each sale or claim VAT on most purchases, reducing time and effort involved in VAT reporting.
• Predictability of VAT Payments. The fixed flat rate percentage makes it easier to predict and budget for VAT payments, improving cash flow management.
• Potential Financial Savings. If your business has minimal expenses that are subject to VAT, you may pay less VAT overall compared to the standard VAT method.
• Ideal for Service-Based Businesses. Businesses with minimal goods purchases, such as consultants, IT professionals and freelancers, often benefit the most. This is especially true if they are not classified as limited cost traders.
• 1% First-Year Discount. This temporary discount provides a cash flow boost, which can be especially useful for new or growing businesses. It only applies in the first year of VAT registration.

While the scheme can greatly simplify VAT reporting and reduce administrative burdens, businesses should regularly assess its suitability, as it may not always remain advantageous as a company expands or its circumstances change.

Exports from Great Britain or Northern Ireland can be zero-rated for VAT, provided businesses obtain valid export evidence within three months of sale and meet all HMRC documentation rules; accuracy and record-keeping are key to keeping the 0% rate.

Businesses are required to charge VAT on most goods that are sold within the UK. However, there are VAT exemptions in place on goods that you export outside of the UK.

Under the VAT rules, businesses can "zero rate" the sale of qualifying goods that are exported. Where this is the case this would mean that no VAT is charged on the goods.

This applies to:

• Goods exported from Great Britain to a destination outside the UK.
• Goods exported from Northern Ireland to a destination outside the UK and EU.

To qualify for VAT zero-rating, businesses must ensure they have sufficient evidence that the goods were exported. This evidence should be obtained within three months of the ‘time of sale’. A longer period may apply in cases where goods need to be processed before export or for thoroughbred racehorses.

The ‘time of sale’ for VAT purposes is the earlier of when the goods are dispatched to the customer or when full payment is received.

It is important to note that businesses cannot zero-rate sales if a customer requests delivery to a UK address. If a customer arranges for collection from the seller (an indirect export), VAT zero rating may still be possible if certain conditions are met.

Maintaining accurate records and ensuring compliance with export requirements is essential to benefit from the VAT zero-rate provisions. Businesses must ensure that they hold proper export documentation and follow the guidelines carefully to avoid penalties and ensure the correct VAT rate is charged.

Not all goods and services carry a 20% VAT, knowing the right rate can save costly mistakes.

When a VAT-registered business issues an invoice to their customer, they must ensure that they charge the correct rate of VAT. Whilst most businesses in the UK charge VAT at the standard rate of 20% there are a number of different VAT rates and exemptions to be aware of. This includes the reduced VAT rate of 5% and the zero rate (0%).

There are two other categories that the supplies of goods and services can fall under:

• Exempt – where no VAT is charged on the supply. Examples of exempt items include the provision of insurance, postage stamps and health services provided by doctors. If a business only sells VAT-exempt goods and services, they cannot register for VAT.
• Supplies that are 'outside the scope' of the UK VAT system altogether. These supplies are beyond the realm of the UK VAT system, and you cannot charge or reclaim VAT on these supplies. Examples include goods or services you buy and use outside of the UK, statutory fees (such as the London Congestion Charge) and goods you sell as part of a hobby.

If a business has made an error in charging VAT, then this needs to be corrected. The timing and amount of an error can impact on how the issue is resolved.

There are also penalties if you charge VAT to your customers before you are officially VAT registered. VAT registration is only required for eligible businesses earning more than £90,000 per year although businesses under the threshold can voluntarily apply for a VAT registration.