Input tax on leased cars
Your business leases cars for your employees, paying VAT on the monthly charges. But are you correctly claiming input tax and what happens if you return the vehicle before the end of the agreement? Or if you receive a rebate of your rental payments? VAT Expert John Craig explains.
If the car has business and private use, you can only claim 50% of the VAT charged as input tax. This percentage applies irrespective of the actual split between business and private journeys for your employees. It is advantageous in some cases but not always.
Leasing companies often issue an annual tax invoice, showing each monthly payment made during the year. The invoice should list each payment date as a “tax point” and this is when you can claim input tax.
Don’t be tempted to claim all of the input tax straightaway when you get the annual invoice. This would be an error on your return and should be corrected in the usual way.
Your business can claim 100% input tax, rather than 50%, if the leased vehicle is deemed to be a “qualifying” car. In other words, you would be able to fully claim input tax if your business purchased it outright. This means that the car must not be available for private use and there should be a physical or legal restriction in place to prevent such use, e.g., a strictly enforced contract of employment for your staff or insurance clause for business use only.
You can claim 100% input tax if you trade as a taxi firm, driving school or car hire business, where your leased vehicle is classed as a tool of trade. The vehicle in question must be primarily used for these purposes, which means that minor private use can be ignored.
The 50% input tax block applies to all other charges made by the leasing company, such as excess mileage fees. The exception is if a separately identified charge is made for maintenance cover. In other words, the leasing company will pay for servicing and vehicle repairs. In such cases, you can claim 100% input tax on the maintenance fee only.
The maintenance fee must be optional. If it is a compulsory charge made by the leasing company, your input tax claimed will still be subject to the 50% block.
Following a change in HMRC’s policy from April 2022, any charge made by a leasing company to allow you to terminate a lease early will now be subject to VAT. The previous view was that the payments were not subject to VAT because you were compensating the leasing company for their loss of revenue. The new policy will mean an extra cost to your business because the termination fee will also be subject to the 50% input tax restriction.
If you get a rebate of rentals at the end of an agreement, usually after the vehicle has been sold by the leasing company, you only need to declare 50% of the VAT credit on your return if you were subject to the 50% input tax block on the leasing payments.
SUMMARY
If a business car is used or is available for private use by employees, you can only claim 50% input tax on the leasing payments. An early termination fee will now be subject to VAT, and you can only claim half of the VAT on this payment if the 50% block applies to the vehicle in question.
