No, there is no VAT on road tax in the United Kingdom. Road tax, officially known as Vehicle Excise Duty (VED), is a statutory levy imposed by the government and collected by the Driver and Vehicle Licensing Agency (DVLA).
Because it is a tax in itself, it is classified as “outside the scope” of Value Added Tax (VAT). You do not pay VAT when renewing your car tax, and consequently, businesses cannot reclaim VAT on this specific expenditure.
Introduction to VAT on Road Tax (Vehicle Excise Duty)
VAT on road tax refers to the VAT treatment of Vehicle Excise Duty (VED), a statutory charge imposed by the UK government for using or keeping a vehicle on public roads.
Vehicle Excise Duty is outside the scope of VAT, meaning no VAT is charged on road tax because UK tax law does not permit VAT to be applied to another tax.
For sole traders, company directors, and VAT-registered businesses, VED is recorded as a non-VAT vehicle expense and does not generate recoverable input tax.
VAT on road tax differs from VAT applied to vehicle-related costs such as fuel, servicing, leasing, and repairs, which may be partially or fully reclaimable depending on business use.
Understanding how VED interacts with HMRC VAT rules ensures accurate bookkeeping, correct VAT returns, and compliant vehicle expense reporting.
Avoid HMRC Fines -
File Your Micro Entity Accounts Without Hassle
What Exactly is Road Tax (Vehicle Excise Duty)?
Before diving into the VAT implications, it is important to define what we are talking about. While colloquially referred to as “road tax,” the official term used by the UK Government is Vehicle Excise Duty (VED). Occasionally, you might also hear it referred to as the Road Fund Licence (RFL).
VED is an annual tax that must be paid for most types of vehicles used or kept on public roads in the UK. The rates are determined by several factors, including the vehicle’s CO2 emissions, engine size, and the date it was first registered.
The revenue generated goes into the general Consolidated Fund, which the government uses to fund public services, including the maintenance of the road network.
Is Vehicle Tax VAT Exempt or Zero-Rated?
In the world of VAT accounting, terminology matters. There is a technical distinction between “exempt,” “zero-rated,” and “outside the scope.”
-
Exempt: These are goods or services where no VAT is charged, but the business providing them cannot usually reclaim VAT on their own expenses.
-
Zero-Rated: These are taxable at 0%. Businesses can still reclaim VAT on the costs of producing these goods.
-
Outside the Scope: These are items that are not part of the VAT system at all.
Is vehicle tax VAT exempt or zero-rated? Neither. Road tax is officially outside the scope of VAT. This is because VAT is a consumption tax applied to the “supply of goods and services.”
Paying your road tax to the DVLA is a statutory obligation; the DVLA is not “selling” you a service in a commercial sense. Therefore, no VAT is applicable.
Is There VAT on RFL?
For those using older terminology, the question often arises: Is there VAT on RFL? (Road Fund Licence). The answer remains the same. Whether you call it road tax, VED, or RFL, the payment made to the DVLA does not carry a VAT element.
If you look at your VED renewal reminder (V11 form) or your receipt from the Post Office/DVLA website, you will notice there is no VAT registration number listed for the transaction, nor is there a breakdown showing a 20% tax charge. This is a clear indicator that the payment is a pure tax levy.
Can I Claim VAT Back on Car Tax?
For business owners, the ability to reclaim VAT is a significant cash-flow advantage. However, because there is no VAT charged on the purchase of road tax, the answer to “Can I claim VAT back on car tax?” is a definitive no.
You can only reclaim VAT (input tax) if you have been charged VAT (output tax) by a supplier. Since the DVLA does not charge VAT on VED, there is no tax for you to recover from HMRC.
When entering this transaction into your accounting software (like Xero, QuickBooks, or Sage), you should use the “No VAT” or “Outside the Scope” tax code.
The Confusion: VAT on Car Hire and Leasing
While direct road tax is VAT-free, confusion often arises when vehicles are leased or hired.
When you lease a car for business use, the leasing company will often include the cost of the road tax in your monthly contract. In this scenario, the leasing company is providing a service (the hire of the vehicle).
They may charge VAT on the full invoice amount, which includes their overheads like VED.
However, if the road tax is passed on as a strictly defined “disbursement,” it might not have VAT. But in most commercial leasing contracts, the road tax is simply a cost component of the taxable supply of vehicle hire.
If your leasing invoice shows VAT on the total amount, you generally reclaim 50% of that VAT (if there is private use) or 100% (if the vehicle is used exclusively for business).
Avoid HMRC Fines -
File Your Micro Entity Accounts Without Hassle
Is VAT 20% or 25%?
There is sometimes a misconception regarding the standard rate of VAT in the UK. People often ask, “Is VAT 20% or 25%?”
In the UK, the standard rate of VAT is 20%. This rate applies to most goods and services. There is a reduced rate of 5% (applied to things like home energy) and a 0% rate (for items like most food and children’s clothes).
The 25% figure is not a UK VAT rate. It may be confused with the VAT rates in other European countries (such as Denmark, Norway, or Sweden) or perhaps with historical luxury tax rates. If you are calculating taxes for your UK business, always use 20% for standard-rated items.
How to Account for Road Tax in Your Business Books
We recommend following these steps to ensure your records are compliant with HMRC’s standards:
-
Categorisation: Assign the expense to a “Motor Expenses” or “Road Tax” account in your nominal ledger.
-
VAT Code: Use the “Outside the Scope” or “N/A” VAT code. Do not list it as “Exempt” or “Zero-Rated,” as this can slightly skew your VAT Return boxes (Box 7).
-
Documentation: Keep your DVLA confirmation email or Post Office receipt. Even though there is no VAT to reclaim, you still need proof of the expenditure to deduct it from your business profits for Corporation Tax or Income Tax purposes.
A Quick Overview of VED Rates
While there is no vat on road tax, the cost of VED itself can vary wildly. Understanding these costs is vital for tax planning.
New Cars (First Year Rate)
The first time a car is registered, the VED is based on its CO2 emissions. This can range from £0 for electric vehicles (though this is changing in April 2025) to over £2,000 for high-emission vehicles.
Second Year Onwards (Standard Rate)
For most petrol and diesel cars registered after April 2017, there is a flat “standard rate” (currently around £190 per year).
The “Premium” Surcharge
If your car had a list price of over £40,000 when new, you must pay an additional supplement for five years, starting from the second time the vehicle is taxed. This is a significant cost for many business owners to consider when purchasing “executive” fleet vehicles.
VAT on Other Motoring Expenses
While vat on road tax is a non-starter, you can reclaim VAT on many other motoring-related costs. This is where your business can save money:
-
Fuel: You can reclaim VAT on fuel used for business trips. Most businesses use the HMRC Advisory Fuel Rates or keep detailed mileage logs and fuel receipts to calculate the reclaimable portion.
-
Repairs and Maintenance: If your business is VAT registered and owns the vehicle, you can usually reclaim 100% of the VAT on repairs, even if the car is used privately.
-
Parking: Most commercial parking includes VAT (check the receipt!).
-
MOT Tests: These are statutory and, like road tax, are outside the scope of VAT.
Why Is Road Tax Not Subject to VAT? (The Legal Reason)
Under the Value Added Tax Act 1994, VAT is charged on the “supply of goods and services.” For a transaction to be within the scope of VAT, there must be a “consideration” (payment) in exchange for a “supply.”
When you pay VED, you are not buying a service from the DVLA. You are fulfilling a legal requirement to contribute to the public purse. The European Court of Justice (and subsequently UK courts) has long held that activities carried out by public authorities under a special legal regime are not “economic activities” and thus fall outside the VAT system.
The Future of Road Tax on Electric Vehicles (EVs)
For years, EV owners enjoyed £0 road tax. However, the UK government has announced that from April 2025, electric vehicles will begin paying VED.
Even with this change, the rule remains: there will be no vat on road tax for EVs. It will remain a statutory tax outside the scope of VAT. Businesses should prepare for this additional overhead in their 2025/26 tax year projections.
Common Myths About VAT and Road Tax
Myth 1: “I can claim the VAT back because I use my car 100% for business.” Reality: You cannot claim back what was never charged. Since the DVLA didn’t charge you VAT, there is nothing to reclaim from HMRC.
Myth 2: “Road tax is zero-rated.” Reality: No. Zero-rating is for specific goods like books or cycle helmets. Road tax is “Outside the Scope.”
Myth 3: “VAT on road tax is included in the price of fuel.” Reality: Fuel Duty and VAT are added to petrol/diesel, but this is entirely separate from the annual VED payment you make to the DVLA.
FAQs: Is There VAT on Road Tax
Is there VAT on road tax for vans?
No. Whether it is a car, a van, a HGV, or a motorcycle, road tax (VED) is always outside the scope of VAT in the UK.
Is vehicle tax VAT exempt?
Technically, it is “outside the scope” rather than “exempt.” While both result in 0% VAT being charged, “outside the scope” means it doesn’t even enter the VAT system.
If I pay for road tax through a garage during a service, is there VAT?
The garage might include the VED as a “disbursement” on your bill. If they treat it correctly as a disbursement (paying it on your behalf), they should not charge VAT on that specific line item.
Is there VAT on a car’s first registration fee?
No. The first registration fee (currently £55) is also a statutory fee and is outside the scope of VAT.
How do I see if I have been charged VAT on a motoring expense?
Always check the invoice for a VAT registration number (beginning with “GB”) and a clear breakdown of the 20% tax rate. If these are missing, it’s likely a non-VAT item.
The Bottom Line
Understanding the nuances of vat on road tax is vital for any UK taxpayer or business owner. To summarise: road tax (VED) is a statutory levy that is outside the scope of VAT. You do not pay VAT on it, and you cannot reclaim VAT on it.
While the UK tax system is often criticized for its complexity, especially regarding questions like “is VAT 20% or 25%?”, the status of road tax is one of the more straightforward areas.
By correctly categorising VED as “outside the scope” in your accounts, you ensure your business remains compliant and your financial reports are accurate.
For more information on managing your vehicle taxes or optimising your business’s VAT position, we recommend consulting with a qualified UK accountant or visiting the official HMRC website.
Disclaimer: The tools and content on TaxCalculatorUK are for informational purposes only and do not constitute tax or financial advice. Our calculators provide basic estimates and may not reflect the latest tax laws.
We recommend consulting a certified tax professional or the HM Revenue and Customs Dept (HMRC) for accurate guidance. TaxCalculatorUK is not responsible for any decisions made based on the information provided.
