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.