Is There VAT on Road Tax in the UK?

When owning or operating a vehicle in the UK, one essential topic that often arises is VAT on road tax. Whether you’re an individual purchasing a new vehicle or a business managing a fleet, it’s crucial to understand how VAT interacts with road tax, and what implications this might have on your overall vehicle-related expenses.

In this comprehensive guide, we’ll break down what VAT is, how it applies to road tax, and how you can use our VAT Calculator to estimate relevant costs quickly and accurately.

What is VAT?

VAT (Value Added Tax) is a consumption tax applied to the sale of goods and services in the UK. The standard VAT rate is 20%, though some items may be charged at a reduced or zero rate. VAT is generally included in the price paid by consumers, meaning businesses act as tax collectors on behalf of HMRC.

This tax is applicable throughout most commercial transactions and, in some instances, may also intersect with various vehicle-related costs.

What is Road Tax?

Road tax, officially referred to as Vehicle Excise Duty (VED), is a tax imposed on vehicles driven or parked on public roads in the UK. The amount of road tax payable is determined by various factors, including the vehicle’s CO₂ emissions, fuel type, and the date it was first registered.

Cars with higher emissions incur higher charges, aligning with the government’s goal of promoting environmental sustainability.

Is VAT Charged on Road Tax?

Here’s the critical question: Is VAT applied to road tax in the UK?
The answer is no—VAT is not charged directly on road tax (Vehicle Excise Duty). VED is a government-imposed statutory tax, and like other taxes such as income tax or council tax, it falls outside the scope of VAT. This means you won’t see VAT added on top of your annual road tax bill.

However, VAT may still be relevant during vehicle transactions and services associated with owning a vehicle, which we’ll explore below.

Use our VAT Calculator to check if VAT is included in your motor-related costs.

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VAT on New Vehicles and Related Costs

While there is no VAT on road tax, VAT is a significant component when purchasing a new vehicle in the UK. The following vehicle-related costs typically include VAT:

• The sale price of a new car – VAT is charged at 20% on the total purchase price.
• Delivery and registration fees – These often attract VAT.
• Vehicle accessories and modifications – VAT applies to additional features or upgrades.
• Warranties, service packages, and roadside assistance plans – VAT is also charged on these optional extras.

If you’re a VAT-registered business purchasing a vehicle solely for business use, you may be able to reclaim some or all of the VAT paid, depending on HMRC’s rules.

VAT on Used Vehicles

The situation differs for used vehicles. In most private sales, VAT is not applicable. However, when buying a used vehicle from a dealership or trader, the dealer may apply VAT in two ways:

1. VAT Margin Scheme – VAT is only applied to the profit margin, not the entire sale price.
2. Standard VAT – Occasionally used for nearly-new or demonstrator models.

In both cases, the road tax portion remains VAT-exempt, as it is still a statutory tax.

VAT and Vehicle Leasing or Hire

Leasing or hiring a vehicle introduces a new context where VAT on road tax might cause confusion. Let’s clarify:

• The lease payments you make will typically include VAT.
• If the leasing company pays the road tax on your behalf and charges it back to you as part of the lease cost, VAT may be added to the overall invoice, including the amount related to VED.

This is not because VAT is charged on this itself, but because the leasing company is providing a bundled service that falls under its regulations.

Looking to break down such bundled costs? Try our VAT Calculator to determine the VAT-exclusive amounts with ease.

Are There Any Exemptions from Road Tax?

Several categories of vehicles are exempt from road tax in the UK, which can also affect how VAT plays into the equation:

1. Electric Vehicles (EVs): Fully electric vehicles registered after 1 April 2017 currently qualify for zero road tax.
2. Classic Cars: Vehicles over 40 years old are typically exempt.
3. Vehicles for Disabled People: Certain mobility-related vehicles are exempt.
4. Charitable Vehicles: Those used exclusively for charitable purposes may also qualify.
5. Public Sector Vehicles: Police, ambulance, and fire service vehicles are tax-exempt.

While these vehicles may avoid this, it’s important to note that VAT could still apply on other related costs like servicing, parts, or accessories.

Can You Reclaim VAT on Road Tax?

Since VAT on road tax doesn’t exist in the traditional sense—because VED is not a VAT-able supply—you cannot reclaim VAT on your these payments.

However, businesses may still be eligible to reclaim VAT on:

• Fuel purchases
• Vehicle servicing and repairs
• Leasing and hire costs
• New vehicle purchases (if solely for business use)

Use our VAT Calculator to explore reclaim scenarios and get a clearer financial picture.

Final Thoughts

To summarise, road tax is not subject to VAT in the UK. The confusion often arises due to VAT being applicable to many other motoring-related services and costs. While you won’t pay VAT on your VED bill, you may still encounter VAT in various other areas related to owning or operating a vehicle.

Always ensure you understand what is and isn’t VAT-inclusive when reviewing quotes or invoices for vehicles and associated services.

💡 Need help breaking down your vehicle-related costs? Use our powerful VAT Calculator to get quick, accurate figures for any VAT-inclusive or exclusive price.

Frequently Asked Questions (FAQs)

1. Is VAT included in car road tax payments?

No, VAT is not charged on Vehicle Excise Duty (road tax) in the UK.

2. Do electric vehicles pay road tax or VAT?

Electric vehicles are currently exempt from road tax but may still incur VAT on the purchase price and related services.

3. Can I reclaim VAT on road tax for business purposes?

No, since VED is not subject to VAT, it cannot be reclaimed. However, VAT on other vehicle expenses may be eligible for reclaim.