vat on car lease

VAT on Car Lease: A Comprehensive Guide

If you're considering leasing a car, it's crucial to understand the implications of Value Added Tax (VAT) on car leases. VAT plays a significant role in the cost and taxation of leased cars. In this guide, we'll explore the ins and outs of VAT on car leases.

Who chooses the financing option, and what are the benefits of VAT on car leases? All will be discussed in this article.

What is VAT?

VAT stands for Value-Added Tax. It's a tax added to the price of goods and services in many countries. Leasing is a way to rent something, like a car, for an extended period. You pay a monthly fee, and the leasing company owns the car. Leasing a car now is just like a piece of cake if you fill all the documents properly.

What is VAT on a Car Lease?

When you lease a car for business, you can get back half of the VAT you paid on the lease payments. This is because the government assumes you'll use the car for personal and business purposes.

The other half of the VAT is the "50% block". It's there to cover the fact that you might also use the car for personal things. The 50% block applies to all the VAT you pay for the car, including any extra fees, such as insurance and maintenance.

The ball is in your court now as if you prove that you only use the car for business, you can get back all the VAT you paid. However, this isn't easy to do, so it's usually best to assume that you'll only be able to get back half.

vat on leased cars

VAT on Car Leases in the UK

Indeed, here's a table with information about VAT on Car Lease in the UK, presented in numerical form:

Aspect VAT Rate (%) Additional Information
Standard VAT Rate 20% Applies to most car lease agreements
Business Lease VAT Claim Up to 100% Businesses may be able to reclaim all VAT on leases
Personal Lease VAT 20% VAT is generally not recoverable for people
Upfront Payment VAT 20% VAT is due on the initial rental or deposit
Excess Mileage VAT 20% VAT applies to extra mileage charges if incurred
VAT on End-of-Lease Buyout 20% VAT may apply when purchasing the leased car
Reduced VAT for Commercial Varies Commercial cars may have reduced VAT rates

VAT is a consumption tax on the value added to goods and services and car leases. The way VAT is applied to car leases can vary. It depends on factors like the type of lease and your status as a business owner or an individual.

VAT on leased cars

You can get back half of the VAT you paid when you lease a car for business. This is because the government assumes you will also use the car for personal use.

Self-Employed Car Lease Tax Deduction UK

Don’t feel under the weather if you are self-employed and lease a car for business purposes, you can deduct a portion of the lease payments from your taxable income. This is known as a self-employed car lease tax deduction. You cannot use the car for personal travel, such as commuting to and from work.

The amount of the deduction depends on the CO2 emissions of the car. If the car has CO2 emissions of more than 50g/km, you can deduct 85% of the lease payments. If the car has CO2 emissions of 50g/km or less, you can deduct 100% of the lease payments.

Leasing a Car Through a Limited Company

Many business owners choose to lease cars through their limited companies. This can have VAT advantages as the company can reclaim a portion of the VAT paid on lease payments. Again, it's essential to consult a tax expert to navigate the specific regulations.

A sole trader car lease is a type of car lease that is specifically designed for self-employed people. If you're VAT registered, you can reclaim up to 100% of the VAT you pay on your lease payments. Sole traders can claim the total cost of their lease payments as a business expense and due to that claim, it can reduce their tax bill.

Also See; Reverse Charge Mechanism (RCM) Explained: A Simple Guide

10 Reasons Not to Lease a Car

While car leasing can offer various benefits, there are better choices for everyone. Here are ten reasons why some people and businesses might select not to lease a car:

  • Ownership

    Leasing doesn't provide ownership of the car. You're renting it for a specified period. You are responsible to pay monthly installment that’s fixed at the time. After clearing all the installments, you will be able to get proper ownership.

  • Mileage Limits

    When you lease a car, you usually have to agree to a certain number of miles per year. You'll have to pay extra if you drive more miles than that. This is called a mileage limit. You cannot exceed the fixed limit.

  • Depreciation

    When you lease a car, you are not the owner of the car. You are renting the car from the leasing company. You must return the car to the leasing company at the end of the lease term so don’t get under the weather.

  • Cost Over Time

    You only pay for the car's depreciation over the lease term, plus interest and fees. Once the lease term is over, you must return the car and start with a new lease or buy the car at a predetermined price.

  • No Equity

    When you lease a car, you don't own it. You're just renting it for some time. This means you don't build equity in the car as you would if you bought it. It’s now not your ownership but you can use the car on certain rules and regulations.

  • Customization Limits

    You can only usually change a leased car with the leasing company's permission. You are not totally free to use this anytime anywhere because the company will allow you and will give you permission to use this.

  • Excess Wear and Tear Charges

    You may incur additional fees for wear and tear beyond normal usage. The ball is in your court now and you can increase the fee to get normal usage other than the fixed time.

  • Early Termination Penalties

    A lease is a contract between you and your landlord. When you sign a lease, you agree to pay monthly rent for a specific time. If you break your lease early, you may have to pay a penalty fee. This penalty fee is usually equal to one- or two-month rent.

  • No Return on Investment

    This is because leasing is a type of long-term rental. You pay a monthly fee to use the car for a specific time, but you don't own the car. You must return the car to the leasing company at the end of the lease term.

  • Commitment to Monthly Payments

    When you lease a car, you agree to make a certain number of monthly payments for a set amount of time. If your financial situation changes and you can't afford to make the payments, this can be a big problem.

The Pros of VAT on Car Lease

Now, let's discuss the advantages of leasing a car:


  • Lease payments are often lower than loan payments for the exact car.
  • Leasing allows you to drive a new car with the latest features and technology.
  • Most leased cars are under warranty, reducing repair costs.
  • You don't have to worry about selling the car when the lease ends.
  • Businesses may benefit from tax deductions and VAT recovery.
  • Predictable monthly payments make budgeting easier.
  • Leasing allows you to change cars every few years.

The Cons of VAT on Car Lease

While VAT on Car Lease has its advantages, it's essential to consider the disadvantages:


  • You don't own the car, and you'll need to return it at the end of the lease.
  • Exceeding mileage limits can result in extra charges.


Understanding VAT on car leases is essential for making informed decisions, whether you're a business owner or an individual. It's crucial to consider your specific circumstances and consult with tax professionals to navigate the complexities of VAT and tax deductions associated with car leasing.


Is VAT Included in Lease Payments?

Yes, VAT is typically included in lease payments.

Can I Deduct VAT on a Personal Car Lease?

No, VAT deductions are usually only available for business-related leases.

How Does VAT Recovery Work for Businesses?

Businesses can often reclaim a portion of the VAT paid on lease payments, but the process can be complex.

Are There Tax Advantages to Leasing Through a Limited Company?

Yes, leasing through a limited company may offer VAT advantages.

What Are the Tax Implications of a Sole Trader Car Lease?

Tax considerations for sole traders can vary based on individual circumstances.

Are There Penalties for Ending a Lease Early?

Yes, ending a lease before the agreed-upon term can result in penalties.

Rían Doyle

I'm a VAT professional with years of experience helping businesses with compliance and reporting. My goal is to simplify VAT calculation and provide valuable insights through my engaging writing style and clear explanations of complex concepts.