VAT Increase Benefits Leasing

Wednesday, 28. July 2010

There’s all sorts of confusion about the VAT increase from 17.5% to 20% next January. The increase affects vehicles in different ways. If, as a business, you buy a car outright you cannot claim back any VAT at all, there is a 100% block. Even if the car is a pool car and only available for use by employees for occasional personal use (and not necessarily used by them) the 100% block will be applied. Even if an employee takes a pool car home in order to make a business trip the following day, this will be deemed as personal use and the 100% block applied. So this will affectively put up the cost of the car by 2.5% in January when the new VAT rate is introduced. However, if the car is leased the leasing company reclaims all the VAT on the purchase of the car but you pay VAT on your monthly payments which only has a 50% block on it if the car is available for business use. So you can see that in terms of VAT the true cost to the business is much less. As an example lets take a £20,000 car, the VAT on the purchase price would jump from £3,500, all of which is 100% blocked, to £4,000 after the increase. That’s £4,000 straight off your profit line. Now let’s say the car costs £250 + VAT per month on a lease. Over 3 years the total VAT payable would be £1,662.50 but 50% is recoverable so the true cost is £831.25. After the increase this will go up to a total of £1,900 reduced to £950 after the 50% allowance. So you can see that even if you are not VAT registered leasing still provides a better option. But now we throw a spanner in the works. Let’s look at the resale value at the end of the 3 years that you keep the car for. If the car is worth £8,000 and you have purchased the car outright with a 100% block, when the car is resold you keep all £8,000 of the sale proceeds. However, in the case of the leasing companies, they can claim back all of the VAT on the purchase but it means they have the repay some of the VAT when the car is sold. The problem is that the car still has the same market value of £8,000 so out of the £8,000 the leasing company must pass over to the VAT man £1,192 at the 17.5% rate but this increases to £1,334 at 20%. Now whilst the non recoverable £1,192 would have been factored into the lease rates the increase of £142 wouldn’t have been so you may well find that within the terms of the contract you could see this amount appearing in your end of lease charges, especially if you took out a cheap rate lease in the first place, the margins aren’t there to absorb it. Is a lease a better deal still? I would say more so. What do you think if I haven’t totally confused you? By Graham Hill