VAT refund on hired vehicles in the United Kingdom: do you know the rules?

The British definition of a "car"

Anyone hiring a vehicle in the United Kingdom who wishes to reclaim the VAT will encounter a specific British scheme that differs significantly from what EU companies are used to. The starting point is the definition of a "car" under British VAT legislation.

HMRC makes a clear distinction between passenger cars and commercial vehicles. Passenger cars, vehicles of category M1, fall under the "car" definition and are subject to a separate VAT scheme for hired vehicles. Commercial vehicles such as vans, category N1, are not classified as "cars" under British VAT law and fall outside this scheme.

This distinction determines how much VAT you can reclaim.

Van: 100% VAT reclaimable

If you hire a van in the United Kingdom for business purposes as a Dutch transport company, the vehicle falls outside HMRC's "car" definition. The 50% restriction does not apply in that case. You can in principle reclaim the full VAT on the hire costs, regardless of the rental period, provided the vehicle is used exclusively for business purposes and you can demonstrate this.

Please note: as soon as a van is also available for private use, the right to full VAT reclaim lapses. HMRC expects clear substantiation of exclusively business use.

Passenger car: the 50% rule and the 10-day exception

If you hire a passenger car in the United Kingdom, different rules apply. HMRC allows only 50% VAT deduction on hired passenger cars as a general rule. The reasoning is that a passenger car is by definition available for private use, even if the vehicle is primarily used for business. The 50% restriction therefore applies automatically, regardless of your actual use.

There is one exception: the 10-day rule. HMRC accepts that if you hire a passenger car for no more than 10 consecutive days, exclusively for business use, the 50% block does not apply. If you hire the car for longer than 10 days, or if it replaces a regular lease car, the 50% restriction applies from the first day of hire.

Are you hiring a passenger car to replace your own lease car or company car that is temporarily out of use? Then the 50% restriction applies from day one, regardless of the length of the hire period.

Documentation and evidence

For a correct VAT refund on hired vehicles in the United Kingdom, good record-keeping is essential. HMRC expects clear evidence of exclusively business use in the event of an audit. This includes:

• Mileage log recording departure and destination, purpose of the journey and odometer reading
• Hire agreement with a clear start and end date
• Invoice from the hire company in the name of your business

Refund via the 13th Directive

As a Dutch company, you reclaim British VAT through the procedure for non-EU businesses, the 13th Directive equivalent for the UK. You submit your application directly to HMRC, not through the Dutch Tax Authority. Note the asymmetrical British tax periods: the British tax year runs from 1 July to 30 June, with a deadline of 31 December.

Let professionals guide you

The British VAT rules for hired vehicles are complex and differ from EU practice in several respects. Delta Refund Solutions is familiar with these rules and advises you on the correct approach for your situation, whether you are hiring a van or a passenger car.

Feel free to contact us, we are happy to help.