Navigating VAT on Leased Cars: What Businesses Need to Know
When it comes to hiring or leasing a car for business purposes, understanding the intricacies of VAT can make a significant difference in your accounting. One common scenario is a business that leases a car and pays VAT on the charges, but only uses the car for business purposes 10% of the time. Here’s a breakdown of how VAT works in this situation and the key points to keep in mind.
Claiming VAT on Leasing Charges
Even if the business use of a leased car is as low as 10%, the business can still claim 50% of the input tax on the leasing charge. This rule applies regardless of the actual percentage of business use. This concession is particularly helpful for businesses with lower business use of their leased vehicles.
What About the Other 50%?
The remaining 50% of the VAT is blocked for deemed private use. This means that even though the car is only used 10% for business, the VAT reclaimable is fixed at 50%, with the other half being non-reclaimable due to its classification as private use.
Is This Always a Good Deal?
While the 50% rule is straightforward, it may not always be beneficial, especially if the business use is significantly higher. For example, if the business use of the car is 90%, being able to claim only 50% of the input tax might not be advantageous.
Key Considerations for the 50% Arrangement
There are two main conceptions to bear in mind with this 50% arrangement:
- Short-Term Hires: If a car is hired for business purposes and the hire period is 10 days or less, the input tax can be fully claimed. This can be particularly useful for businesses that need short-term vehicle rentals for specific projects or peak periods.
- Full Claim Eligibility for Certain Vehicles: If the leased vehicle would have qualified for a full input tax claim if it was purchased outright, the business can claim the full input tax. This typically applies to vehicles used as tools of trade, such as cars hired by taxi firms or driving schools, or vehicles that qualify as genuine pool cars available for general use by employees.
Conclusion
Understanding the rules around VAT on leased cars can help businesses make more informed decisions and optimize their VAT claims. While the 50% claim on input tax is a helpful concession, businesses should assess their specific usage and consider the rules for short-term hires and tools of trade to ensure they are maximizing their VAT recovery.