VAT on leased cars
VAT is one of the most complicated, if not the most complicated taxes. There are many specific rules that apply to certain scenarios as well as many exceptions.
In this week’s article we are going to look at VAT on leased cars
VAT on leased cars
Purchasing a car in full upfront can have a big impact on a small businesses cash flow. This leads many small businesses to lease a company car.
This allows a small business to spread many smaller payments out over a longer time period. Typically, payments will be made to the lessor on a monthly basis.
However, there is a VAT complication on leased cars.
Usually, there is a 50% restriction on the amount of VAT a business can reclaim on the lease rental of a car.
The lessor will still charge you the full amount (100%) of the VAT due. Therefore, the other 50% of the VAT charge will become a sunk cost for your business.
The 50% VAT restriction applies to all VAT charges that you pay under the lease agreement terms.
The 50% restriction applies because legislation assumes that there will be some element of private use.
However, if you can demonstrate that the car will be used exclusively for business, the restriction does not apply. This may be the case where the car is a pool car which is available to multiple members of staff and is kept on site when not in use. In which case the full 100% of VAT charged can be reclaimed.
Vans
Vans are specifically excluded from the above rule.
As with other tax rules, vans are treated differently from cars. Vans are deemed to be commercial vehicles where any private use is likely to be incidental.
Cars leased primarily for the purpose of taxi or driving instruction
Two exceptions to the above VAT on leased car rule are cars used primarily for taxis or driving lessons.
You can reclaim 100% of the input VAT on the lease charge if your car is a qualifying car and you intend to use it primarily for:
- Hire with a driver for carrying passengers
- Providing driving instruction
Self-drive hire (daily rental)
The 50% VAT restriction also applies to self-drive hire (daily rental) cars.
However, only if the daily rental car is being used to replace an off the road company car.
It does NOT apply if you are not replacing an ordinary company car, and you are only hiring the vehicle for a period of 10 days or less.
VAT restriction on additional services included within the lease agreement
It is important to note that the VAT restriction applies to all VAT charges you pay under the terms of the lease.
This may include optional services & excess mileage charges.
Separately charged maintenance and services
A HMRC concession allows you to reclaim 100% of input VAT on other services such as maintenance that are not included in the lease agreement.
Before claiming 100% input VAT, you should ensure that any services are specifically excluded from the lease terms.
This is regardless of actual personal use.
We understand that this is a very complex topic. If you have any queries regarding VAT on leased cars, please do get in touch.