VAT On Lease Rentals

When you pay lease rentals, Value Added Tax is due on the lease rentals at the standard VAT rate (normally 20% at the date of publication).

VAT Recovery On Lease Rentals

Typically, VAT registered businesses can recover the VAT paid on the lease rentals for vans, but there is a restriction in the case of passenger cars.

For passenger cars only 50% of the VAT paid on the lease rental is recoverable, even for VAT registered organisations that would normally be able to recover all of the VAT on business costs.

The restriction on VAT recovery applies to all passenger cars with the exception of those used wholly for business purposes (called 'pool' cars).

Effectively this means that all company cars are subject to the 50% restriction on VAT recovery. Only 'pool' cars which are never used for private motoring qualify for 100% VAT recovery.

Lease Rental Rebates

If there is a final rental to pay at the end of a lease (typically in balloon leasing), the business usually receivesWhere a lessee receives a rebate of lease rentals (effectively a refund), the VAT refunded with the rental rebate is treated in a similar way to the original VAT paid.

In effect, because the lessee could not recover 50% of the VAT incurred on the original lease rentals only 50% of the VAT refunded with the rental rebate is passed on to HM Revenue & Customs.

Maintenance

The VAT recovery restriction applies to the lease/hire rental, but if any maintenance services provided by the leasing company are supplied under a separate maintenance contract which is distinct from the vehicle lease contract, the VAT recovery restriction does not apply to maintenance payments.