Context
The Motability Scheme addresses the market failure in the provision of suitable transportation for disabled people, from limited access to cars to the cost of adapted vehicles and access to insurance.
There is a transport accessibility gap today. The difference between journeys undertaken by people with mobility difficulties and those without has been stuck at around 38% for a decade.
Public and commercial transport options for disabled people are still inadequate, reflected in the concentration of Motability customers in suburban or rural areas (81%).
VAT
UK VAT law (VAT Act 1994) includes provisions specifically designed to support disabled people through VAT relief on Motability Scheme leases and end-of-lease vehicle sales where they are linked to qualifying mobility benefits.
100% of the value of the VAT relief is passed through to disabled people who lease vehicles on the Scheme through lower lease prices. It is targeted support for disabled people that the Scheme administers on behalf of government. The Scheme is designed to operate with a small margin and any financial surpluses are reinvested into the Scheme or used to support disabled people’s mobility.
The Scheme’s structure is fully compliant with VAT law, with oversight from HMRC and DWP.
Recent changes to VAT and Insurance Premium Tax
The Government changed the tax treatment of the Motability Scheme in the 2025 Autumn Budget. From 1 July 2026, VAT at 20% applies to Advance Payments and certain other charges on new leases, while the Scheme’s exemption from Insurance Premium Tax (IPT) was also removed. Wheelchair Accessible Vehicles and certain heavily adapted vehicles continue to receive specific protections.
The core lease payment funded by a customer’s qualifying mobility allowance continues to receive VAT relief, as does the sale of vehicles at the end of their Scheme lease.
Without changes to the Scheme, the new taxes would have added around £300 million a year to its costs – equivalent to around £1,100 on an average lease. Motability Operations changed parts of the leasing package to offset around £700 of that cost, limiting the average additional cost to customers to around £400 over a three-year lease. Existing leases were not affected by the changes.
Removing the remaining VAT relief
Removing the remaining VAT relief would add further significant costs to Scheme leases and risk excluding disabled people from the freedom and independence the Scheme provides. Any further changes by a future Government would lead to difficult trade-offs, including:
- Making the Motability Scheme unaffordable for many disabled people, limiting their ability to go to work or attend hospital appointments.
- Significant implications for the UK car industry, as fewer cars built in Britain can be purchased by the Motability Scheme.
- Reducing the amount of VAT taken by the Treasury as the number of disabled people on the Scheme reduces.
A spokesperson for the Motability Scheme said:
"The Motability Scheme exists to enable freedom and independence for disabled people. The VAT relief that remains is passed directly to disabled customers through lower lease prices. Removing it would add thousands of pounds to the cost of mobility and risk making a car unaffordable for many disabled people, fundamentally undermining the purpose of the Scheme."
If the remaining VAT relief was removed, there are a range of ways in which the additional cost could be met. For example, the features of the Scheme could be changed further to save money or upfront Advance Payments could increase.
Modelling undertaken before the July 2026 tax changes found that applying VAT more broadly to the Motability Scheme could add thousands of pounds to the cost of a lease. The precise impact would depend on how any further change was designed and how customers responded to higher prices.
The median household income of a disabled person using the Scheme is around £18,500 – about half the UK average (£36,700). Significant increases in upfront costs would therefore risk making the Scheme unaffordable for many disabled people and increasingly limiting participation to those able to meet those additional costs.
Research also shows that a majority of disabled people using the Scheme would not replace their Scheme vehicle by purchasing a car through another route. Removing the remaining VAT relief could therefore make it much harder for disabled people to access affordable mobility. It also means that assumptions about the amount of additional VAT revenue that could be raised need to take account of customers leaving the Scheme and fewer vehicles being purchased.
The Scheme operates at scale, allowing bulk purchasing and strong manufacturer discounts. A significant reduction in participation would erode these efficiencies and undermine the Scheme’s social purpose of enabling independence and affordable mobility. It would also have knock-on consequences for vehicle purchases, dealerships, manufacturers and jobs across the UK automotive sector.
