Car Leasing and Contract Hire – The Question of VAT

The impact of VAT in contract hire.

Nothing in this world is certain but death and taxes. Benjamin Franklin was sadly quite right when he said this, but perhaps a little pessimistic on taxes. They can not only be postponed, but avoided if you make sure you are making the right financial decisions for you or your company.

You may think you know how to do this, but if you’re new to car leasing then you do need to know how the taxman here in the UK looks at it.

If you’ve bought a car for your VAT-registered business before you will have noticed that you couldn’t claim back the VAT on the car. So cars are completely unlike your other business expenses, like the cost of input materials or operating costs, and are also not treated like your assets – whether pcp car deals short or long term assets. Doesn’t seem fair, does it? Especially when the price of a new vehicle is a major cost – that 17.5% addition to the total price of the car is substantial. You see, the Taxman, or Her Majesty’s Revenue and Customs as he’s known to his friends, simply doesn’t believe you when you say you’ve bought the car for business purposes. He assumes that there will be private usage, and probably most of the usage will be private, so he insists on treating your business like it’s an end consumer.

Now, there are exceptions to this rule. If you happen to be buying the vehicle so you can drive people around the town and country as a professional taxi-driver, then that’s accepted by the taxman as different and you can receive the VAT back. Similarly if you’re buying the car so you can use it to be a driving instructor. More broadly, if you can demonstrate that the car is used exclusively for business purposes, then you can claim the VAT back. This means that the employee’s employment contract states that any personal use of the car whatsoever risks dismissal, beyond being simply verbally told that it is forbidden. It’s not impossible to do this, but HMRC has and continues to challenge business owners who try to reclaim VAT on a passenger car which they state is used purely for business purposes. It’s not easy to do this and if peace of mind is a concern, I wouldn’t advise it unless you had some serious tax advice.

Fortunately, it’s a little less difficult if you’re purchasing a van or truck that has an obvious business purpose, like a lorry or a white van. Then you can reclaim the VAT on acquisition.

But back to happier topics and why if you leave a car it may have tax benefits for you. When a business obtains a car through leasing, then it is allowed to claim back 50% of the VAT. Business car leasing is perhaps seen more as an ongoing operational expense for the business. The taxman basically splits the difference with the business, while saying that it accepts that there will be some private use and that is how they will allow for it. Therefore the price excluding VAT is important for businesses looking at company car leasing, and so all websites quote both a ‘business contract hire’ price excluding VAT and a ‘personal’ price including VAT. So that’s why, no matter what you thought you knew about VAT and businesses buying cars, car leasing deals quote prices both with and without VAT.

Another good thing is that the business can reclaim the VAT spent on the vehicle’s repairs and maintenance, so long as the business pays for it and the vehicle has been used for business purposes.

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