Car Leasing and Contract Hire - The Question
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.
Have a look at - contract hire
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 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
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.
VAT on petrol is a little more complicated to consider. There are several different
options and the optimal route will depend on the level of total and personal usage.
We suggest that you start, before getting advice, by looking at what HMRC has to
say on their website.
The best place to go from here if you want to know more about this topic and you
are wondering how best to finance your vehicle is where you can see all the best
current car finance deals for both business and personal car leasing in a very
transparent way. You can compare with personal contract hire (and the best PCP
car deals), hire purchase and car loans - in fact, the website offers details on any
possible form of car financing.