Could a car lease be costing you more than you think?

If you are VAT registered then YES, quite possibly.

There is a 50% reduction in the amount of input tax which can be recovered in respect of lease rental payments on a car. The reduction is to take account of any private use, which is presumed to occur. Even if there is no private use , input tax recovery is restricted to 50%.

The input VAT restriction applies to any business that provides a lease car to a company employee or director for a period of more than 10 days.

Maintenance Costs

The 50% input tax block applies to the lease element of the contract only. If there is a maintenance element, then this is deemed to be a business expense, and you are allowed to reclaim 100% of the input tax on the maintenance charge.

A maintenance charge must be a separate line item on the invoice.

Does that include vans?

No, vans are excluded as these are deemed to be commercial vehicles where any private use is likely to be incidental to it’s intended commercial use.

Are there any exceptions?

Yes, if your car lease fits any of these criteria then you may recover 100% of the input VAT on the lease charge.

  • Short hires where the hire period is no more than 10 days because the car is required for a specific business trip
  • If the car is a valid pool car:
    • kept at the business premises;
    • never kept overnight at a private home;
    • never allocated to a single employee; and
    • any private use (such as lunch stops) is incidental.
  • A leased car is used exclusively for business purposes, unless it is:
    –  let on uncommercial terms not at arm’s length; or
    –  made available for private use by the lessor and not let on hire.

Case Examples

  • A cigarette vending machine operator acquired a Lamborghini motor car for use in his business, which involved visiting night clubs. He conducted his business 7 days a week, from 8 am to midnight or later and he never made personal use of the car. However, as he was unable to obtain insurance which excluded private use, it was held that he must be taken to have intended the car to be made available to him for private use, so no input tax could be recovered. C & E v Upton (t/a Fagomatic) [2001]
  • Contrast the above case with one involving a company which acquired a car for wholly business purposes, even though the car was driven by the company’s sole employee, the director. The car’s insurance cover permitted private use, but this was only because the broker had stated that it was impossible to insure a car for business use only. A Board minute noted that the company intended to limit the use of the vehicle to business only, so if the car had been used privately, this would have constituted a breach of the employee’s contract of employment. This was a clear statement of intention that the vehicle was not intended to be made available for private use, therefore the input tax was deductible. Elm Milk Ltd v HMRC [2006]

Accounting for a car lease invoice in your books

   Purchase Ledger Entries

31-Jan- xx   Say we received an invoice for £250 plus VAT broken down as follows:

  • £150 is the vehicle lease
  • £100 is the maintenance contract
  • £  50 is the input VAT at 20%
  • £300 invoice total
Invoice Narrative Account Code VAT Code Net VAT Gross
Vehicle lease cost: 50% Allowed Vehicle Lease (P&L) Standard rate 20% 75  15  90
Vehicle lease cost: 50% Disallowed Vehicle Lease (P&L) No VAT 75 0 75
Disallowed VAT Vehicle Lease (P&L) No VAT 15 0 15
Maintenance Charge Vehicle Lease (P&L) Standard rate 20% 100 20 120
Invoice Total     265 35 300
           

 VAT and lease termination

When a lease is terminated, the leasing company may charge an additional payment, or may refund an amount to the customer. In either case, the leasing company may choose whether to treat the event as a taxable supply or a supply outside the scope of VAT.

If an additional payment is charged with VAT, the lessee may recover 100% of the VAT charged.

So, If a refund is made, the lessee must account for 50% of the VAT in respect of the rebate, provided that only 50% of the input tax was recovered in respect of the original charges.

 

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